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Edited Transcript of FLS earnings conference call or presentation 3-May-19 3:00pm GMT

Q1 2019 Flowserve Corp Earnings Call

IRVING May 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Flowserve Corp earnings conference call or presentation Friday, May 3, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John E. Roueche

Flowserve Corporation - VP of IR & Treasurer

* Lee S. Eckert

Flowserve Corporation - Senior VP & CFO

* Robert Scott Rowe

Flowserve Corporation - President, CEO & Director

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Conference Call Participants

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* Andrew Alec Kaplowitz

Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head

* Andrew Burris Obin

BofA Merrill Lynch, Research Division - MD

* Brett Logan Linzey

Vertical Research Partners, LLC - VP

* Deane Michael Dray

RBC Capital Markets, LLC, Research Division - Analyst

* John Fred Walsh

Crédit Suisse AG, Research Division - Director

* Joseph Alfred Ritchie

Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Michael Patrick Halloran

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst

* Robert Scott Graham

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Welcome to the Flowserve First Quarter 2019 Earnings Call. My name is Paulette, and I will be your operator for today's call. (Operator Instructions) Please note, this conference is being recorded.

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

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John E. Roueche, Flowserve Corporation - VP of IR & Treasurer [2]

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Thank you, Paulette, and good morning, everyone. We appreciate you participating in our call today to discuss Flowserve's financial results for the 2019 first quarter. 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 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 May 3, 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 would now like to turn the call over to Scott Rowe, Flowserve's President and Chief Executive Officer, for his prepared comments.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [3]

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Thanks, Jay, and good morning, everyone. Flowserve's first quarter results are a strong start to the year, and I'd like to begin by recognizing our associates for their continued engagement and enthusiasm around the significant changes that we are driving within the company. Our associates are leading the Flowserve 2.0 effort to accelerate growth, reduce complexity and streamline the Flowserve operating model, and we are making great progress.

We executed well during the first quarter, delivering $0.44 of reported EPS and $0.41 of adjusted EPS, with transformation costs and below-the-line foreign exchange impact more than offset by net realignment benefits. As realignment activities wind down and lower-cost transformation initiatives continue, we expect the size and number of adjusted items to moderate in the years ahead. We fully intend to narrow the difference between our reported and our adjusted results.

We will continue to use our Flowserve 2.0 transformation initiatives to drive further operational and productivity improvement company-wide. The actions we have taken thus far were validated by strong year-over-year margin expansion again this quarter. Adjusted gross and operating margins increased by over 300 basis points in the first quarter.

Improving free cash flow is also a priority for us, and I am pleased with our stronger performance in the first quarter as compared to a year ago. The improvement is still primarily attributed to an intense and manual effort, but I am confident that we're beginning to develop the underlying process changes needed to deliver more sustainable and consistent cash flow conversion at higher levels.

As many of you know, Flowserve and our industry as a whole, is impacted by seasonality, and the first quarter is traditionally the lightest of any year. So I'm pleased with the performance in each of our segments this quarter. We are off to a good start in 2019.

Our newly formed FPD segment delivered strong operating improvement, including 450 and 440 basis point improvement in adjusted gross and operating margins, respectively. While we no longer report on the former IPD segment, I will share that during the first quarter, IPD's former facilities in aggregate improved their operational excellence, on-time delivery, productivity and adjusted operating margins year-over-year.

As I discussed at our Analyst Day last year, the rationale for the combined FPD segment is to better serve our customers and fully leverage the scale of our pump platform from both a manufacturing and aftermarket perspective. FPD's strong 24% total bookings growth, which is led by a 56% increase in original equipment awards, benefited from this combination, as improved sales force collaboration allowed us to capitalize on a number of market opportunities. We also expect cost benefits and additional manufacturing improvements as we implement common processes and best practices across the platform.

The FCD segment, our valves and automation business, once again delivered a strong quarter, including 230 and 290 basis point improvement in adjusted gross and operating margins on modest 1.8% revenue growth. FCD's bookings were down 2.3%, but included roughly 3% of negative currency impact. Additionally, the comparison period was challenging, as last year's first quarter represented FCD's highest bookings period of the year.

We expect FCD to again deliver strong full year performance, including improved collaboration with our FPD organization, to better leverage the entire Flowserve portfolio to support the increased project activity.

Looking now at our overall bookings and end markets. We're particularly pleased to have produced $1.07 billion of total bookings, representing year-over-year growth of 14.9%, including a nearly 25% increase in original equipment bookings. These strong results are a function of our growth-oriented transformation initiatives, combined with more robust infrastructure spending. As market visibility continues to improve, we expect near-term booking levels to remain solid.

Additionally, the health of the market is giving us confidence in our ability to continue to improve our pricing. We are seeing good results from our price increases that went into effect at the beginning of the year, and we are pleased with the acceptance and resiliency that we have seen thus far. We have initiated further price increases over the last few months where we have the opportunity to price at higher levels.

Flowserve delivered the highest quarterly level of bookings since the second quarter of 2015 and our fourth consecutive quarter at over $1 billion. First quarter bookings continue to be driven by smaller run rate and upgrade activity, most of which are below $10 million in size. We did obtain one larger oil and gas award in the $30 million to $40 million range, but have yet to see a significant increase in new large project activity, as these customers continue to work toward FID on many of the sizable opportunities. We will remain disciplined on pricing for these larger projects to ensure that Flowserve earns the appropriate profit for the value we deliver.

During the quarter, our aftermarket franchise generated nearly 6% bookings growth, representing the fourth consecutive quarter with bookings over $500 million. As we successfully embed many of the commercial intensity initiatives across our global aftermarket platform, we are capturing an increased share of our customers' maintenance spend.

We continue to expect our customers will focus on facility maintenance, increased efficiency and meeting changing regulatory requirements in the near term. And when combined with our growth-oriented transformation efforts, these factors will provide ongoing opportunities for Flowserve to expand the aftermarket business.

Now from a served end market perspective, and starting with oil and gas. Bookings in the first quarter increased 45% year-over-year, driven primarily by FCD's 66% growth, including our largest award of the quarter at over $30 million in Asia Pacific. Both FPD and FCD, however, saw the bulk of their orders in the $3 million to $15 million range primarily in the Middle East and Asia Pacific. Downstream investments drove much of the increase as we continue to support refining modifications for clean fuel production and efficiency upgrades.

With relatively stable commodity prices, we expect increased project activity to occur near term in both downstream and midstream oil and gas. While Flowserve has traditionally been predominantly downstream-focused, we are utilizing our strike zone initiative within the transformation to successfully increase our pursuit, and more importantly, our capture of midstream pipeline opportunities with a coordinated effort across our pump and valve offering. We booked a handful of orders in the first quarter and have good line of sight into additional midstream opportunities throughout 2019.

Finally, we have yet to benefit from the expected large project activity in the marketplace, both those still in the FEED stage and the ones already awarded to EPCs. While timing is always difficult to predict, we do expect increased refining and LNG projects to provide good opportunities for our industry in the coming quarters.

In chemicals, our quarterly bookings increased approximately 6% year-over-year, including 4% of currency headwinds. Both FPD and FCD contributed mid-single-digit growth, again supported by smaller projects and run rate investment. We are encouraged by the near-term opportunities and remain confident in the second wave of North American ethylene development. We also expect increased investment in Asia and the Middle East as oil majors and national oil companies increasingly pursue integration up the petrochemical value chain.

The power market remains our most challenged industry, with first quarter bookings essentially flat year-over-year. FCD's first quarter bookings, however, increased 13% in this market as it benefited from several nuclear awards across North America, Asia Pacific and Europe. We expect industry-wide headwinds to continue in power markets for the near term, although limited opportunities do exist related to fuel switching, new build nuclear in China and fossil fuel development in Asia.

We also continue to support existing Western nuclear facilities with maintenance, upgrade and life extension activity. Additionally, the concentrated solar power market is a niche opportunity for Flowserve in the growing renewables space, and we have a differentiated technology offering that we provide to this market.

First quarter bookings in general industry declined 5% year-over-year, including nearly 4% of currency headwind. FCD was down approximately 23% in this market primarily due to lower distribution activity that was negatively impacted by North American land-based upstream volatility due to oil pricing pressures in the fourth quarter. Given the oil price rebound this year, we expect to see growth in North American upstream through our distribution channel later in 2019.

General industry bookings also declined in mining, pulp and paper and agriculture, although each of these markets currently represent less than 3% of our overall mix.

Lastly, representing our smallest market, water bookings increased approximately 24% in the first quarter, including several small awards in both segments and primarily in North America. From a geographic standpoint, we delivered strong growth in all regions except Europe. Compared to the 2018 first quarter, North America was up nearly 18%, the Middle East and Africa increased 45%, and Asia Pacific was up 21%. Latin America also grew nearly 20% -- sorry, grew nearly 27%, but off a low base. European bookings declined nearly 11%, including approximately 7% of currency headwinds.

I will 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 up the call to Q&A. Lee?

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Lee S. Eckert, Flowserve Corporation - Senior VP & CFO [4]

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Thanks, Scott, and good morning, everyone. Flowserve delivered a very good start to the year, with adjusted earnings per share of $0.41, in line with our expectations. On a reported basis, first quarter EPS was $0.44, which included realignment benefit of $0.09, $0.04 of transformation charges and $0.02 of negative below-the-line currency impact.

First quarter is traditionally our seasonally low quarter in the year. Revenues were $890 million, a decrease of 3.3% versus prior year. Excluding approximately 5% of headwinds from currency and divested assets, revenues are up about 2% year-over-year. Additionally, this year, only 17% of our first quarter revenue utilized over-time percentage of completion accounting compared to approximately 23% a year ago.

This reduction was a result of differences in sales mix between the 2 periods, disciplined spending on larger projects in progress and the deliberate efforts we made last year to ensure that the new, smaller contracts that we booked did not contain terms and conditions that would trigger over-time accounting. Compared to a year ago, Flowserve's current backlog has a higher percentage of contracts where revenue will be recognized as work is completed and shipped.

As a result of the growth we delivered in recent quarters in aftermarket bookings, aftermarket sales increased for the first quarter by 3.4% or 7.9% on a constant currency basis to $470 million and comprised 53% of our sales mix, which was a 300 basis point increase over last year's first quarter.

Now looking at margins. First quarter adjusted margin increased 340 basis points to 33.7%, matching the highest quarterly level since 2015. Both segments contributed to the improvement, with FPD expanding adjusted gross margin by 450 basis points to 33.7% due to continued operational improvements, fewer but higher-margin large project POC contracts in progress and a 500 basis point mix shift towards aftermarket sales.

FCD's adjusted gross margin increased 230 basis points to 34.8% on modest revenue growth as it continues to operate at a high level. On a reported basis, we had a 280 basis point increase in gross margin to 34.6%, which was driven by essentially the same factors as well as approximately $1 million of less realignment expense in 2019.

Adjusted SG&A decreased $5.2 million to approximately $214 million or 24% of sales, relatively flat with last year's first quarter. On a reported basis, first quarter SG&A decreased $24 million, which included a $17 million net realignment benefit.

At the operating level, our adjusted operating margins improved 310 basis points to 9.9% as a result of our strong gross margin and ongoing tight cost controls. On a reported basis, operating margin increased 540 basis points, where improved operating performance, further benefit from a net reduction of approximately $20 million in adjusted items primarily related to realignment. Our adjusted tax rate was 25.6%, slightly lower than our full year adjusted tax rate guidance of 26% to 28%.

Turning to cash. We delivered a substantial year-over-year improvement in free cash flow. Strong earnings, some timing benefit and our continued focus on working capital produced operating cash flow of $39 million, a $159 million improvement versus the 2018 first quarter. Working capital declined over $100 million and as a percent of sales decreased 360 basis points to 28.4%.

Scott mentioned we are working towards driving company-wide improvements within our order-to-cash and inventory processes to create a sustainable, systemic operating model. These changes are the necessary foundation to enable Flowserve to achieve our longer-term cash conversion target. While much of the quarter's improvement was again driven by intense focus and highly manual efforts, we will continue this brute-force approach until the enabling technologies are in place and the underlying process improvements take hold.

In the first quarter, we returned $25 million to shareholders through dividends, paid off $15 million of long-term debt and invested in the business with $11 million of capital expenditures. We ended the quarter with a healthy cash balance of nearly $640 million, a sequential increase and improvement of over $100 million from the year-ago level.

As I'm sure you've seen from other companies, you may have noticed in our balance sheet, at the start of the year, a new lease accounting standard was implemented, which required companies to account for operating leases on the balance sheet. For Flowserve, this charge added about $200 million to both assets and liabilities as of March 31.

Turning to our 2019 outlook. As we mentioned previously, we are actively reinstilling a culture of excellence, continuous improvement and a focus on meeting our commitments. And with our first quarter results keeping us on pace for the full year, we are reaffirming our full year targets.

On an adjusted basis, we continue to expect EPS between $1.95 and $2.15 a share and $1.60 and $1.80 on a GAAP basis. Similarly, we also confirm our expected revenue growth of 4% to 6%, including full year headwinds from currency of 1.5% and roughly 0.5% from last year's business divestitures. This level of performance will keep us on track with our longer-term 2022 targets we laid out in December.

The adjusted EPS target range excludes the 2019 expected realignment and transformation expense of approximately $50 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.

Net interest expense is expected in the range of $55 million to $57 million, with an adjusted tax rate of 26% to 28%. Additionally, we expect traditional back half-weighted seasonality, generally in line with the 2018 quarterly phasing, as we deliver additional transformation benefits.

From a 2019 full year cash usage perspective, we expect to return approximately $100 million through dividends to our shareholders. Capital expenditure is expected in the $90 million to $100 million range. We also expect full year debt repayment of approximately $50 million and to contribute approximately $20 million to our global pension plan, mainly to cover our ongoing service costs, as the U.S. plans remain largely fully funded.

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

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [5]

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Great. Thank you, Lee. As I wrap up, I would like to spend a few minutes on our outlook and the progress of our transformation efforts. When we formally commenced the Flowserve 2.0 transformation program a little over a year ago, we knew it was going to be a multiyear journey and we are convinced that Flowserve had a significant opportunity to better serve our customers, our employees and our shareholders.

A year into the journey, I'm very pleased with the progress we've made. We have built momentum and have increasingly shifted to a self-sufficient, internally-led program while greatly reducing the amount of third-party reliance. We are encouraged by the results that we are starting to see in all areas of the business.

Flowserve has improved operationally as demonstrated by 4 consecutive quarters of increased year-over-year adjusted operating margin. We've driven improvements in our manufacturing productivity, our planning and scheduling as well as in our supply chain management. Our growth initiatives, combined with an improved market outlook, have driven 4 consecutive quarters of $1 billion-plus bookings.

As we continue to push the transformation initiatives deeper into our business, we are confident that we will build on the results delivered today. Perhaps most encouraging, there's still significant opportunity ahead of Flowserve. Much work remains to achieve the 2022 targets that we presented last year, but we are instilling the culture, developing the processes and changing the operating model to create sustainable long-term value.

We are making good progress on both the health and the performance of Flowserve. We're still in the early phases of the transformation and I am convinced there are significant opportunities ahead of us. Our commitment to Flowserve 2.0, combined with the strong first quarter performance, gives me the confidence that we can deliver on our 2019 commitments.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Michael Halloran from Baird.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [2]

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So just some questions then on the margins as we look through the year here. Obviously, some of the prepared remarks talked about the mix benefit on the aftermarket side in the first quarter. Obviously, the margins from here would imply some pretty healthy results relative to guidance, potentially. So could you help with that cadence through the year here? What was sustainable from the first quarter as we work forward, and how those cost initiatives and mix and things like that should play out as we work forward?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [3]

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Yes, sure, Mike. I'll start and then I'll let Lee fill in because I'll probably miss something here. But I'd say there was a 3% mix shift towards aftermarket in the first quarter, and so that was one thing and that will probably unwind as we go throughout the rest of the year. But what I'd say in the first quarter is that we had no major surprises. And historically, at least as long as I've been here, we've had a surprise almost every quarter. And so we're doing well on execution and eliminating that. Additionally, we're on the positive side of the price/cost curve. And as I discussed in my remarks, we've now had 2 pretty substantial price increases in the year. And we feel pretty good about our ability to continue to -- our ability for that to continue to stick throughout the year.

And then we're just more selective on the work that we're taking. And so as we think about what goes into our facilities and what we can execute, we're making sure that we can deliver value when we deliver that work. And then finally, the other thing is that our past due backlog is significantly down from where it was a year ago. And so that was consuming a lot of cost and incremental cost into that backlog. And as that's cleared and in a much better place, the margins are in a good place right now and we expect to keep a similar result throughout the year. Lee, do you want to add anything?

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Lee S. Eckert, Flowserve Corporation - Senior VP & CFO [4]

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Yes, I think you summarized it pretty well, Scott. Our focus is to drive year-over-year margin expansion. And as Scott mentioned, the key drivers is price ahead of inflation. We're driving supply chain savings as part of our Flowserve 2.0. We're executing better on projects. We're just -- we're not having surprises like we had in the past. And then we're also winning the right contracts, too. We're much more selective on what we're winning and executing on that.

But the last item is one -- so all those should continue through the rest of the year. The last one is the aftermarket mix. And our expectation is that it's going to be more balanced. And especially with the significant amount of orders we won and what's in our backlog, we're going to see a lot more obviously original equipment through the balance of the year. So while we are driving year-over-year margin expansion, it should not -- you should not have a conclusion that, that will lead to sequential margin expansion.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [5]

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So if I could unpack that then, you're basically saying mix is going to be a swing factor from here, but as far as internal initiatives go, price/cost, things like that, it feels like more of a tailwind from the first quarter looking ahead. Is that fair?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [6]

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Yes, mix is the headwind, and then we offset that headwind by transformation activities and doing the good things that we did in the first quarter.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [7]

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Great. And then a comment on the pricing side. Is the pricing limited from ability in the marketplace to some of the aftermarket and the more higher-end niche applications? How does it all -- could you talk about that side, but then also how does pricing look on the larger projects, those $3 million to $15 million-plus kind of range? How competitive is it? And obviously, you're being more price-disciplined, but love to hear about the opportunity set there as well.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [8]

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Yes, I'll just talk about what we've done this year so far and then I'll talk a little bit about the current environment. So we did our price increase earlier this year than we ever have. In fact, we announced it in December and it went into effect in the early parts of January. And that was pretty much across our entire offering with the exception of the engineered-to-order products that we build up that cost and then price off of the build-up of the cost. We're seeing really good resiliency in the price increase that we issued in the beginning of the year.

And that affects all of our business, right? It's seals, it's parts in the aftermarket, it's valves and it's on more of the base products within the pump portfolio. And so that's got good traction. We're seeing good results from that and we expect to continue that throughout the year. In addition to that, what we've done in the engineered-to-order is we've started to raise our margin expectations as we've been able to drive costs out in the execution. Instead of passing that on to customers, we're capturing that ourselves. And so we're pricing at higher levels than we have in the past, and certainly much higher than what we did in the first quarter of last year.

And then finally, the third piece of this is there are selective areas where we've got a preferred position or a niche opportunity, where we've also added price increases on top of what we've done at the beginning of the year. So we feel very good about where we are on price right now relative to cost inflation, tariffs and everything else. But there are areas of concern. And what I'd say is the areas are primarily the larger projects. And for some reason, larger projects attract more attention. And what we're seeing from peer group and competitors is that, that gets incredible focus on price reduction and becomes highly competitive.

And so we understand that. And what we're going to do is we're going to price our big projects accordingly. We would love to have some of those in our backlog and in the portfolio, but at the same time, if we can't get the price that makes sense to create ultimate value, then we're not going to do those jobs. But there still is -- it's surprising to me, there still is a lot of pressure in large pump projects and in large more engineered valves projects as well.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [9]

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But that's a very -- much smaller percentage of your portfolio today than historically, correct?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [10]

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Absolutely.

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Operator [11]

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Our next question comes from Deane Dray from RBC Capital Markets.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [12]

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You guys should really do more resegmentations, if you could put up numbers like that. So maybe the first question is in cash flow. So we like seeing the progress year-over-year. And I was interested that both of you talked about still in an intensely manual process. Maybe share with us where and how does that get automated or more systemized, if I can use that word. But then also, it's not just the speed of order-to-cash, but what's the ultimate plan for working capital? Because it just seems your capital intensity is still a bit too high for the businesses that you're in. And where and how are you looking to drive down working capital?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [13]

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Yes, so Deane, let me start and then I'll let Lee jump in and go into the details here. But we're making good progress on working capital, but this is the area that we continue to talk about, right? Flowserve was highly decentralized and trying to get this accomplished across the enterprise has just been incredibly hard work. And so right now, we're doing it with management attention, intensity and a big manual effort. Ultimately, we want to have far more transparency and the ability with an integrated system to do this from a systematic standpoint.

And what I'd say is the manual effort is getting good results, right, we're down significantly from where we were last year, 32% and now we're at 28.4%. But we still have a long way to go. And this is not our aspiration. In fact, we're fully striving to be somewhere in the -- closer to the 20% mark as a percentage of revenue. So we know we have a long way to go here. As part of the transformation, this is a major initiative, both on the inventory side and the receivable side, but we're definitely getting traction. And from a year ago, we're in a far better place than we were. And so you'll continue to see improvements here, but it's really going to be slow going until we can really start to have an integrated and more systemic approach to this. Lee, why don't you go into a little bit more on the cash flow side and touch on working capital.

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Lee S. Eckert, Flowserve Corporation - Senior VP & CFO [14]

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Sure. So as I mentioned, pretty big improvement, $160 million, driven -- $43 million in earnings, $85 million in working capital and about $44 million, I would say, is more timing related. So we do expect that to kind of bounce back during the year. But as Scott mentioned, there's an intense focus, Deane, on working capital, and important. So some of the things we've talked about in the past is -- the first things we did is we made sure everybody is incentivized to focus on working capital. There is not a location you would go to where people are not talking about the progress we're making on inventory and receivables, and that wasn't the case before.

But the manual effort, where we would like to get to are places where we have centralized billing, centralized collections, centralized SKU management system. Today, we don't have those capabilities, right now, it's all at our sites. And so right now, while the manual effort, people are aligned and focused on it, as we've said, it's kind of brute-force effort. But we are putting plans and processes in place to centralize, get scale. I -- you'll be embarrassed to say that, in many cases, I invoice -- I send invoices by mail. And a lot of -- and often, it's snail mail. Those should be electronic payments. And so those are some of the things that we need to do to drive the balances down. And as Scott said, our goal -- our short-term goal is to get to around 20%.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [15]

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All right.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [16]

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And Deane, one last thing I failed to say on the incentive structure is, Lee brought it up, and I said this in the first quarter, but it is driving behavior. And so now we've got everybody incentivized with working capital. And then the other thing we did is, historically at Flowserve, that incentive was an end-of-year metric, which obviously, is not going to help you bring down working capital throughout the year. And so this year, we've changed that. And it is your average. And so we're really getting that attention much earlier in the year, and our teams are focused on driving that down.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [17]

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Got it. That's all really helpful. And then the second question is a little bit more reflective of just what happens when you start making progress and you can see Flowserve 2.0 turning the corner here, is when do you get to start playing offense? It sounds like yesterday, there'll be some energy pumps and valves assets coming on to the market. And it just raises the question of when will you be ready to go back into M&A? What's the timing? What makes sense? And we'd appreciate some color on that.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [18]

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Yes, sure. Well, obviously it's a dynamic space right now in the industrial flow control market. And so we have our ear to the ground and we're watching things evolve and move forward. For us, we are very focused on Flowserve 2.0 and driving that agenda and getting the results that we need. I'm not going to commit to say third quarter this year, we're ready to go, or fourth quarter, but what I'd say is we are definitely making progress. And so every quarter that we go through, I'm more confident that we've got a platform that we can integrate something into. But as we just talked about, right, it's still highly manual and it's not as clean and simple as we would want. And so as we start to move forward and develop our enterprise-wide IT systems and start to have more consistency in our operating results, then I'd start to get more comfortable about moving toward the offensive.

Now with that said, we've got to make sure that there's a requirement that we are generating value if we were to go outside and look at acquisitions. And so it's got to be financially attractive. We've got to be able to integrate it almost seamlessly or have the confidence and the ability to integrate. And we'd also still need to maintain financial flexibility. And so we're going to be prudent about what those are. And what I'd say right now is we're still very focused on the Flowserve 2.0 agenda. But if we can have a couple more good quarters like we had in Q1, then we get more confident in our ability to execute and run a bigger business.

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Operator [19]

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Our next question comes from Andrew Obin from Bank of America.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [20]

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Yes, I was going through my model, I was trying to figure out when was the last time you had positive free cash flow in the first quarter. It only goes back to '05, and I haven't seen any quarters like that, so congrats.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [21]

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Thank you, Andy.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [22]

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So a question on that. You sort of talked that there were onetime items in the quarter on working capital. I just want to make sure that -- and I understand that there will be payback throughout the year, but what are the chances of us seeing quarters with negative free cash flow in 2019? Or should we assume that they will go up and down, but pretty much free cash flow will be positive throughout the year?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [23]

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Lee, do you want to take this one?

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Lee S. Eckert, Flowserve Corporation - Senior VP & CFO [24]

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Yes, so without giving like quarterly guidance on cash flow, we do -- there is -- we do have a major, I would say, outflow that's going to happen in the second quarter around compensation. So that will be a drag in the quarter. But our focus, as Scott talked about, is continuing to drive working capital improvement quarter-to-quarter, and so that should continue to build. So I'm not going to give guidance on the second quarter cash flow, but I do expect you will see a change in liabilities in the second quarter.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [25]

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Yes, and I'd just add, look, we've got an intense focus on cash flow right now. We just talked about working capital. And as you know, right, first quarter is always the most challenging on working capital. So we got off to a reasonably good start. We expect to improve that as we go forward. And I think with that focus and the expanded margins as we look at the back of the year, we feel pretty good about staying in a good space on cash flow.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [26]

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Right. But I just want to make sure that there's historically, right, I mean if you look at the swing, the swing from Q1, Q2 is fairly substantial. So if you are in fact sort of gaining operational traction, maybe it's breakeven. But second quarter, can you comment whether there is a chance that can be negative or not? And I know that you don't guide, but I'm just trying to understand the magnitude of the swings that we could see in the second quarter.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [27]

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Yes, there are some timing issues, but I wouldn't expect a big step backwards here.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [28]

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Good. Second question on pricing. You highlighted the fact that pricing is getting better, and I'm just trying to understand what's driving it. Can you comment maybe on industry capacity? Clearly, for whatever reason, people are behaving more rationally. Why, all of a sudden, you have ability to implement pricing and for pricing to stick?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [29]

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Sure. On the pricing side, again, we've done some really good work, and we've been far more sophisticated about how we price and where we have our opportunities than ever before. And so we're using a lot of data and a lot of analytics, and what that tells us is that we've got opportunities in certain areas. And so we're trying to -- what I would say is we're trying to catch up probably to some of our more sophisticated peers on pricing. And so we've done that.

And then in addition to that, the backdrop of tariffs and cost inflation also give us the ability to have true and honest discussions with our customers to say, "Hey, here's the real environment." I do think there are -- we are getting some traction with the peer group and competitors in the base business and so we're seeing folks lift prices up a little bit. But like I said earlier, where we still see highly -- high degrees of competition is in the more engineered-to-order type projects. And the bigger project they are, it's attracting more people. And for whatever reason, we're seeing significant price pressures on anything in the large project sizes.

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Operator [30]

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Our next question comes from Scott Graham from BMO Capital Markets.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [31]

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A couple of questions around sales, some expenses and what have you. So the implied organic on a full year basis is 6% to 8% thereabouts. And we have the first quarter which kind of came in at 2%, and I get the whole POC accounting change stuff. I guess what I'm wondering, though, is that your second and third quarter comparisons are pretty tough, so it would seem to me that you're expecting a pretty back half-loaded and perhaps even fourth quarter-loaded sales year. Can you kind of give us a little bit of color there? And does that mean that, that fourth quarter could be maybe fairly mix negative for margins?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [32]

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Well, here, let me talk about our revenue profile and then we'll hit margins. I'm going to lead it off and then I'll let Lee clean up here if I missed something. But let's just talk about first quarter. Typically, as you know, right, that's seasonably our lowest quarter and we expect to go up from here. And I'd say, in the first quarter, I'm pleased with the execution that we had. So we didn't have any major surprises and it was pretty much in line with our internal expectations. We have improved operations dramatically from a year ago and so we're able to clear that huge capacity backlog that we talked about a lot in Q1 and Q2 of last year. And then we continue to expect the revenue growth throughout the year with the increased backlog, right? So with these bookings, we've got higher backlog and we expect to convert that at a higher level as we move forward. So Lee, did you want to talk about a little bit of the finer details on the revenue side? And then talk about the forward look there?

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Lee S. Eckert, Flowserve Corporation - Senior VP & CFO [33]

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Yes, sure. Just a couple of points. First, I would say that first quarter was roughly in line with our internal expectations, where we recognized less project revenue than last year. At the beginning of the year, we had fewer large contracts that qualify for the POC accounting versus last year. Last year, the 606 impact on revenue in the first quarter was $71 million. Unfortunately, the margin on that incremental revenue was really low, it was like 9%. The good news is that the margin in the backlog starting this year is clearly better. So the first quarter revenue, the net is that our sales are down but our margin is up.

The third thing I would -- or second thing I would say is that, as you've seen in our guidance, you alluded to it, we're still expecting 4% to 6% growth. So if you just do the math, that would expect a 6% to 9% balance of the year revenue growth. Now the good news is that -- from our perspective is that if you look at our backlog and you assume a certain conversion or historical conversion, our book-and-burn is roughly equivalent year-over-year. So that gives us the confidence that we can hit the sales number. But your point on margins going forward, there's clearly a second half lift, as I talked about, between the 6% to 9%. But it's going to have a lot more equipment in it, so that would put some downward pressure versus the aftermarket margins.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [34]

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Yes, so like we said before, right, the aftermarket-OE mix goes more OE in the back half of the year and so that's a headwind to margins. And we're trying to offset that margin headwind with our pricing and with some of the stuff in the Flowserve 2.0 on cost reduction.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [35]

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Understood. That's very clear. My other question is around corporate overhead. And honestly, from the outside looking in, that's always a tough one to estimate. Is this a reasonable run rate number, the first quarter, plus or minus $3 million for the year, and then it goes higher in the fourth quarter? Just maybe give us a little bit of thinking on that.

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Lee S. Eckert, Flowserve Corporation - Senior VP & CFO [36]

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So unfortunately, it is an area that bounces around, depending on certain types of expenses or costs that we typically may not push down to the platform. So there is some timing that happens. So this quarter, we were down roughly, what, $10 million to $11 million than the fourth quarter. We're slightly up versus last year's first quarter due to some of the timing around benefit accrual. So it does bounce around. I think this quarter we are $25 million. I think that's pretty consistent over the course of the year. It could go up, it could go down, but on average, it should be around that number.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [37]

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Okay. That's hugely helpful.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [38]

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Yes, and let me just add long term there, right, that is still an area that we are very much looking to drive down further. But this goes back to integrated systems and doing things a little bit better from a process standpoint. And so what I'd say as we continue to move toward our enterprise IT systems and as we continue to improve our process and our operating models, we'll start to get even further improvement off this overhead costs. But this one is -- this is a very painful one for me, personally.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [39]

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Yes. Well, Scott, to that same end, if I might just sneak in this last question on SG&A because I know that the corporate obviously affects that. So what we -- we might not completely gain back in operating margin what we lose in mix in the second half of the year, but wouldn't it -- greater OE shipments imply a year-over-year percentage reduction in SG&A in the second half of the year? And what is your ultimate target for that number, if it is -- for let's say this year, maybe even next year, whatever you can give us, not the 2022, just kind of what are you thinking on that number for this year in total?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [40]

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Yes, I would say -- I mean our aspiration is 20%. And I don't think we will be there by the end of the year. And again, it goes back to just this is taking longer than we thought, with systems and our ability to drive more process -- better and improved enhanced processes. But I think we'll make progress as revenues continue to grow in the back half of the year, we'll make progress in bringing this down, but we're not going to get to the goal of 20% this year.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [41]

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No, no, I know that. I was just making sure that SG&A as a percent of sales because of maybe a little bit more OE in the revenue, that should naturally decline more, right?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [42]

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Yes, it will come down as a percentage of revenue a little bit, yes.

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Operator [43]

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Our next question comes from Andy Kaplowitz from Citi.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [44]

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Nice quarter. Scott, so 4 quarters in a row of aftermarket bookings over $500 million. I think one of the initiatives that you had, right, when you became CEO is to really capture more of Flowserve's installed base. Is Flowserve beginning to do that at this point? And do you see good sustainability of maintaining or even growing off of this $500 million of bookings a quarter run rate?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [45]

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Yes. No. It's a really good point. And I'd say one of the differentiating factors of Flowserve and the peers is that we do have an -- just an incredibly large installed base. And so this is something that we've got a major initiative and effort within the transformation. We talked about this in December at the Analyst Day. We're calling it commercial intensity. But essentially, what the commercial intensity initiative is, is looking at a local geographic site that might have 2 or 3 refineries and a petrochemical facility and it's how does our local team in that local Quick Response Center start to get more of our installed base and capture our entitlement to do the aftermarket?

And then the other thing that we're doing is we're starting to add services and moving up the value chain or the maturity curve of services. And so ultimately, what we want to do is provide more holistic services and move from just providing parts and maybe a service call-out here and there. And so I think all of that stuff is starting to come together now. We've rolled out commercial intensity worldwide, so we're completed now through the Americas, our Europe, Africa and Middle East business and then also in Asia Pacific. We're seeing really good results when we first started the program in North America, and now we're just starting to see the benefits in Asia Pacific and in Europe.

So as we continue to evolve that program and continue to get more mature, I'm confident that we can sustain this type of levels and continue to grow our aftermarket business. And then ultimately, as we move to reliability-based systems and add more technology here, we'll really start to partner with operators, their maintenance departments, their reliability departments and providing a much more holistic service overall in our aftermarket offering.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [46]

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That's helpful, Scott. And then can you give us a little more color into what's happened with FCD bookings? Well, the booking's relatively flattish in the quarter, was that all related to general industrial being weak? And we know you mentioned oil price volatility impacting the general industrial business. You mentioned that you'd expect to see a better North American upstream channel given higher oil prices. Have you already seen improvement in that end market yet? Have your customers really stopped destocking at this point?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [47]

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Yes, so that was the challenge for FCD. And it was -- as you know, right, general industries contain the distribution booking. And so really that was the only negative spot in our FCD bookings, was the North American distribution channel. And so as commodity prices went down in the fourth quarter, distributors stopped stocking and putting more product on their shelves. And I think that it's very natural. It happens all the time, and we've got good visibility to their inventory levels. And so I'd say we had a little bit of warning and knew it was coming.

Now what I expect is with oil prices back in a much better place than where we were at the beginning of the year, we should start to see completions in production in North America progress probably sometime late this quarter or in the back half of 2019. And as that activity increases, we'll see distributors start to spend money and stocking product on their shelves. And where we get the biggest benefit is in that FCD side. And so I feel reasonably good with the FCD bookings overall, but I would say that's probably the -- the biggest risk is when does North American activity start to come back and to start to put product back on their shelves.

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Operator [48]

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Our next question comes from Jeff Hammond from KeyBanc.

And our next question comes from Joe Ritchie from Goldman Sachs.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [49]

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Nice quarter.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [50]

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Yes, thanks, Joe.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [51]

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On the POC disconnect in 1Q, the 6 percentage points that you referenced, how does that play out for the remainder of the year?

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Lee S. Eckert, Flowserve Corporation - Senior VP & CFO [52]

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So Joe, this is Lee. My expectation, as we mentioned, tied to our bookings, is that we would just see more -- the way I would equate to it, we'll see more project revenue. And so during the balance of the year, there should be more project revenue than we had seen in the first quarter. As you can tell from our variances, year-over-year, our project revenue was down, we're expecting that to grow the balance of the year.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [53]

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Yes, I guess maybe my follow-on there, Lee, is when you compare it, though, to your Q2 to Q4 in 2018, do you still expect to see favorability in percentage completion accounting and how that impacts your margins? Or does that kind of net out because your project revenues are maybe up year-over-year?

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Lee S. Eckert, Flowserve Corporation - Senior VP & CFO [54]

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I guess I'm not -- I wouldn't word it that way. I think what I would say is that year-over-year, we're going to see more project revenue. I'm not -- we're not necessarily keeping a scorecard on like how much POC. But what I would say is that as -- with our backlog, with our order wins in the first quarter, we're going to have more project revenue in the second half of the year.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [55]

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Okay, fair enough. And then my one follow-on is really going back to the margins. Obviously, great performance this quarter. Recognize that there'll be mix headwinds as we progress through the year on the project side, but like there's still just a lot of like goodness that you have going through the model right now from a margin perspective. And so I guess my question is, Lee, you mentioned earlier not to assume sequentially that margins would be better, but it would -- it seems like, sequentially through the year, margins should be better in each of the businesses. So I just want to make sure I'm not missing anything.

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Lee S. Eckert, Flowserve Corporation - Senior VP & CFO [56]

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Yes, I just -- I think there's going to be some lumpiness from quarter-to-quarter. I think on a trailing 12 basis, it would be better. But I think it depends on how much project activity gets recognized in that quarter. So if we have a quarter where there's a number of large projects that go out, it could put some downward pressure on the rate. Now on a trailing 12, the point is that sequentially, you should see improvement. But I think, like I said, quarter-to-quarter, it could bounce around. It should be better year-over-year, but quarter-to-quarter, there could be some lumpiness.

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Operator [57]

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Our next question comes from Joe Giordano from Cowen.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [58]

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So just on the guide here. I mean I know you guys are being very measured in terms of how you're publicly setting commitments and wanting be very comfortable in your ability to be able to deliver on them, which I think we all appreciate. If I just think forward from here, with the understanding that 1Q is a low contributor to your full year, the midpoint of your guide is kind of 20% incrementals on the midpoint of your revenue guide and we have very easy comps for like 2Q and 3Q on the old -- what's the old IPD. So can you just walk us through kind of is that just conservatism and a little cushion there? Or how should we think about incrementals? I mean you were up obviously a lot on the decline in this quarter, so if we're expecting growth in the next 9 months, it seems like a fairly easy bar to get to.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [59]

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Yes. No, Joe, we understand. And we've done all the math and had a lot of discussion on this. But I just -- for us and where we made the decision is we're still very early in the year. And so we're pleased with what happened in the first quarter and we're focused on meeting our commitments for the rest of the year. But there's still a lot to do, right? I mean we've got to execute on our transformation. We've got to continue to hold the margins. I mean a lot of things still have to go right for the next 3 quarters.

And then the other thing, I just want to remind you and others that in December, we talked about at the Investor Day, right, we talked about the different phases. And the first phase we were in, which is all of last year, was the stabilize phase, and now we're very much in the transformation phase. But the stabilize phase wasn't that long ago and so we're still concerned about potentially some surprises here and there. But we feel very good that the teams are making great progress and we very much want to move into our optimized state.

And so right now, we're very committed to what we said in our full year guidance. And then again, the full year guidance is 17% EPS growth year-over-year. And so it's not a small task. And what I'd say is when we put guidance out, we want to make sure that we can absolutely meet that commitment. And that's what we're trying to instill internally here at Flowserve and so that's what we're going to do externally. But we'll continue to reassess it throughout the year and as things move and change and -- but right now, we're sticking with the full year guidance we put out last call.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [60]

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That's fair enough. And then if I can -- on the organic growth guide for the year, just considering the price increases that you put in, in December and you put in some new ones this year, how much of that do you think is price alone?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [61]

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Yes, I think -- I mean we're not doing anything crazy on price, right? We're never going to get to a 5%, 6%, 7% price increase. So I would say it's a really small percentage revenue growth here. But what we are confident in is that the pricing increases that we're seeing is -- it's absolutely offsetting inflation, tariffs and any cost headwinds. And so we feel very good about that. It's definitely a portion of our margin expansion story here. And yes, I think you can see that as we go forward.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [62]

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If I can just sneak in one last one. Another competitor on the pump side this morning talked about their oil and gas funnel as kind of -- they've already won a bunch of these orders and like the funnel needs to kind of reshape here. And they're exposed slightly different than you and it seems like there's a bit of different color. So if you could talk about like the oil and gas funnel from here, what's kind of been -- has there been a lot of projects that you've passed because of the competitiveness that you talked about? And how full does that pipeline look on the new projects?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [63]

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Yes. No. We actually feel really good about our oil and gas outlook. And as I said earlier and as you know, right, we're more of a downstream-focused company. And so we're highly focused to the refinery side, and we feel good about the outlook for the next couple of quarters in the refinery segment. A lot of that's driven by regulation changes and the move to cleaner fuels. And so that's moving very well.

As we talked about in the Investor Day in December, right, we launched the strike zone initiatives to get back into the midstream space. And so this is midstream pipeline primarily focused on the Americas, but obviously, there's pipeline work all over the world. We're seeing incredible progress with the pipeline work. And so we know we're taking market share because this is an area that we didn't have any bookings in 2017 and early parts of '18. And so there's still a lot of build-out in North America on pipeline and our outlook for the pipeline in the midstream is incredibly robust into Q2, 3 and 4.

And then the other big piece here is LNG. And so we got a handful of LNG orders early in -- in the first quarter, and we're actually very pleased with what we were able to bring in. But it's just the beginning of this LNG wave and so there is a significant amount of LNG projects going forward. And for us, we've got a great valve portfolio that supports the LNG projects. In addition to that, we've got pumps that fit into that space as well. And so when we talk about our power of a pure-play initiative, where we're bringing our pumps, valves and seals together, the LNG market is one that we're absolutely focused to bring the whole portfolio of Flowserve together to capitalize on that. And so I think you'll see more LNG discussion from us as we go throughout the year into 2020.

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Operator [64]

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Our next question comes from John Walsh from Crédit Suisse.

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John Fred Walsh, Crédit Suisse AG, Research Division - Director [65]

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So once again, echo everyone's sentiment on a solid quarter. I wanted to follow on that discussion with orders and kind of think about obviously as we get here into the back half, you have some difficult comps, but it sounds like you're really excited about the midstream and pipeline and the opportunity on the LNG side. How would you kind of characterize the activity level if you had to put a number around it? I don't know if it's -- should we think about the orders as a 2-year stack? Or how do you think about that profile as we go through the rest of the year here, obviously knowing that quarterly earnings can bounce around?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [66]

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Sure. Let's just stay on bookings and orders. Again, we feel very good about the outlook. And so we like what we see. Our project funnel is bigger than it ever has. The concern would be on the MRO and predominantly the North American land business that has slowed down in the first quarter, and it's more about when does that start to recover and get back. But overall, our project outlook is substantially better than where it was last year. The initiatives with commercial intensity and the ability to capture more on the aftermarket space is -- we're doing that on the back of some tailwinds on increased maintenance and spending. And so I feel very good about our ability to kind of keep continuing to grow and keeping a healthy number of bookings certainly into the second quarter and realistically, throughout all of 2019.

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John Fred Walsh, Crédit Suisse AG, Research Division - Director [67]

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Okay, great. And then maybe just a question here around the pump division. I think when you were first speaking about that combination, a lot of the synergies were kind of focused around bookings and kind of sales. Obviously, a very strong margin in the quarter. Curious if you're actually seeing any cost synergies from the combination as well.

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [68]

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Yes, so we talked about this in the Investor Day. And the genesis or the reason that we pooled them together was really focused on our customers and better supporting our customers. And I think we're making tremendous progress on that. And so there are no -- there's no silos, there's no barriers within the pumps platform now, and we're better positioned to manage the commercial operations, project management. And now, we're moving into kind of the manufacturing, planning, the supply chain side, the product rationalization opportunities. And all of those things will start to drive costs -- product costs down and improve our productivity within the manufacturing.

So I think there's more good things to come here in terms of driving costs out. We haven't really started that today. And really, the focus has been about really getting positive customer response and doing the right thing for our customers. And then what I'd say is in the first quarter, we received incredibly positive feedback from a lot of our customers that we've got better communication, clearer accountability and then ultimately, better performance is helping there as well. But I do think we'll continue -- we will get some costs and cost savings as we continue to integrate these 2 platforms and drive those activities forward.

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Operator [69]

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Our next question comes from Brett Linzey from Vertical Research.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [70]

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Just want to come back to free cash flow. I guess from your internal vantage point and maybe relative to plan, what line items came in better than you expected? And then as I think about the $65 million swing in contract assets, and I think it was about a $40 million in accrued liabilities, what's the big driver there? Just a little more granularity on those dynamics.

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Lee S. Eckert, Flowserve Corporation - Senior VP & CFO [71]

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So thanks, Brett. So what I'm happy to say is like, actually, nothing came in as a surprise. I think for the first time, we kind of actually nailed our cash forecast. So I think everything -- to Scott's point earlier, I think we're executing where we expected to be between the sell-through net, margin and also the working capital. So I would say nothing really surprised us. I think it came in pretty close -- what surprised us is that we came so close. And so that's a good thing.

As far as the contract assets, I think it just shows the change in behavior versus last year versus this year. Last year, I just -- the processes weren't in place. So contract assets are effectively WIP, and material was brought in, not with the discipline this year as it was last year. So last year, I think in the call last year, we were really disappointed. We didn't think we had a good handle on what's going on with inventory. And we learned from that.

And through the balance of the year, we were much more disciplined. Scott added to the organization and put metrics in place and doing weekly tracking. And as we went into this year, we kind of ended the call on our last call that we were expecting to have much better control around the first quarter, around the amount of material we're bringing in and getting the jobs out, and that played out. The team did an outstanding job getting the contracts out and putting the discipline in place to make sure material wasn't coming in.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [72]

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Okay, great. And then just specific to 2019, I mean a quarter -- a little bit more than a third of the way through 2Q here under your belt, what's the expectation in terms of free cash flow for this year? Scott, I know you mentioned 20% as an aspirational free cash flow margin over time, but what's the marker for this year as we progress towards that 20%?

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Robert Scott Rowe, Flowserve Corporation - President, CEO & Director [73]

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Let me answer a little different. We got beat up around our free cash flow conversion. I think we were under 50% last year, and I think Deane is the one who always beats us up on that. And I think when I was on the call, I talked -- the question was what -- give a target. And I said over 75%, and I think that's still good.

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Operator [74]

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Thank you. Ladies and gentlemen, we have reached our allotted time. This concludes today's conference. Thank you for participating, and you may now disconnect.