Welcome to the Flowserve 2019 Second Quarter Earnings Conference Call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. 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.
Thank you, Paulette, and good morning, everyone. We appreciate you participating in our conference call today to discuss Flowserve's 2019 Q2 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 flowserv.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.
Thanks, Jay, and good morning, everyone. Flowserve delivered solid second quarter financial results building on the momentum of the Q1. 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 remains high 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 in detail. We delivered 2nd quarter revenue growth of 1.7% or 6.2% excluding currency and divestiture impacts and drove adjusted gross and operating margin improvement of 60 basis points 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 impacts 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 2nd quarter or 10.8% excluding the impact of currency and divestitures and are up 14% for the first half of twenty nineteen. Operating improvement in leverage drove a 230 basis point and 2 10 basis point improvement in adjusted gross and operating margins respectively. With the multi year realignment program now largely complete, we are optimistic about the opportunities ahead for this segment. Our legacy 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 percent of negative currency impact. Margins were negatively impacted in the quarter due to shipping a higher mix of lower margin project work and a slowdown in short cycle MRO activity. As a result, adjusted and 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 well in the next chapter of his life. Turning now to our overall bookings and end markets. 2nd quarter bookings increased 6.5% to $1,100,000,000 including sequential growth of 3.6%, reaching the highest level in over 3 years. Excluding the impact of currency and divestitures, 2nd 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 $20,000,000 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 12% over prior year and over 7% sequentially, accounting for 54% of bookings and reaching the highest level since 2015 Q2. 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 is 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 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're seeing in 2019.
In fact, the Q2, 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 to roll the rollout of the commercial intensity initiative in the quarter, driving increased aftermarket capture and producing our 5th consecutive quarter with bookings over 500,000,000 dollars 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 on a 2% year over year, driven primarily by FPD's 30% growth with FPDs contributing a 6% increase.
Both LNG and midstream pipeline awards represented over 5% each of Flowserve's bookings this quarter. 2 of our largest awards in the quarter related to our 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 20 investment in refining debottlenecking and efficiency upgrades. Regionally, North America and the Middle East delivered a number of orders in the $5,000,000 to $10,000,000 range across the downstream and upstream markets.
North American upstream has recovered modestly since the Q1 slowdown, but it is not back to the levels that we experienced in 2018. Our chemicals markets remained strong in the 2nd quarter delivering nearly 3% growth, including 3.7% of currency headwind. Growth was driven primarily by smaller projects and run rate investments and FCD's 16% growth, which included an $11,000,000 project award in Europe. We continue to believe that the strong pipeline investment expected in North America, Asia and the Middle East will present near term opportunities, including ethylene crackers and derivative facilities. Challenges in our power markets continued where 2nd quarter bookings declined 4% year over year.
We were pleased that FPD received a $20,000,000 award for a concentrated solar power project in the Middle East, which is a growing niche power market for us where we have a differentiating offering for pumps, valves and seals. Overall, we expect industry wide headwinds to continue in traditional power markets for the near term. We do continue to see opportunities related to fuel switching, new build nuclear in China and competitive fossil fuel development in Asia. We also continue to support existing nuclear facilities with maintenance, upgrades and life extensions, which drove a $4,000,000 aftermarket award for us in Asia Pacific this quarter. 2nd 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 and 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 2nd 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, 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
and then I'll return for closing remarks before we open the call up to questions and answers. Lee? Thanks, Scott, and good morning, everyone. As previously mentioned, we are pleased with our strong performance in the Q2. 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, 2nd quarter EPS was 0 point 44 dollars which included $0.08 of realignment and transformation charges and $0.02 of negative below the line currency impacts. For the 1st 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. 2nd quarter revenues were $990,000,000 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.
2nd quarter aftermarket sales increased 2% or 5.4% on a constant currency basis to $498,000,000 or 50% of our sales mix similar to prior year. Turning to our margins. 2nd quarter adjusted gross margin increased 60 basis points to 32.5 percent 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 percent, 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 percent on improved operational execution, decreased realignment items and the impact of 20 eighteen's loss on an asset sale.
2nd quarter adjusted SG and A declined $7,600,000 to approximately $214,000,000 As a percentage of sales, adjusted SG and A decreased 110 basis points to 21.6 percent as a result of focused cost control and modest revenue growth leverage. On a reported basis, 2nd quarter SG and A decreased $17,000,000 including approximately $10,000,000 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 FPD's 12.1% adjusted operating margin increased 2 10 basis points year over year, which was partially offset by FCD's 110 basis point decrease. Although SCD 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 $30,000,000 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 $100,000,000 versus prior year, including earnings growth and approximately $80,000,000 improvement in working capital, which drove our cash balance to approximately $600,000,000 or roughly $80,000,000 higher than last year's 2nd quarter balance. Additionally, primary working capital as a percentage of sales declined 160 basis points to 28.5%.
While we 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 Q2 are approximately $15,000,000 We also returned $25,000,000 to shareholders through dividends and repaid $15,000,000 of long term debt. In July of this year, Flowserve entered into a new $800,000,000 5 year senior credit facility, replacing the one that has supported us since 2012. Our new facility will provide 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 $2.20 per share. The adjusted EPS target range excludes the expected 2019 realignment and transformation expense of approximately $50,000,000 as well as below the line foreign currency effects and the impact of other discrete items, which may occur during the year. As a result, we also increased our reported EPS range between $1.75 $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 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 a growth in our short cycle MRO business has decelerated in recent months. Net interest expense for the full year is expected to between $55,000,000 $57,000,000 with an adjusted tax rate of 26% to 28%. From a 2019 full year cash usage perspective, we expect to return approximately $100,000,000 through dividends to our shareholders. Capital expenditures are expected in the $90,000,000 to $100,000,000 range. We also continue to reduce our long term debt within our credit facility during the remainder of the year and we expect it to contribute approximately $20,000,000 to our global pension plans, 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.
Great. Thank Lee. As I wrap up, I'd like to spend a few minutes on our outlook and the progress of our transformational efforts. We are well into Flowserve 2.0 transformation program that commenced in early 2018. I am very pleased with the momentum that we are 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 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 that we are starting to deliver in the areas of our business, including strong bookings and backlog growth, consistent margin improvement, increased manufacturing productivity, reduced working capital and lower past due backlog. Even more encouraging, there is still significant opportunity ahead for Flowserve. Much work remains on the path to our 2022 targets that we presented last year, but we are instilling the culture, developing the processes and changing the operational model to create sustainable long term value. As we approach the middle innings of our transformation, I am confident that we will build on the momentum that we have created and continue to drive further improvements at Flowserve. Operator, we have now concluded our prepared comments and we'd like to open the call for questions.
And our first question comes from Andrew Kaplowitz from Citi. Please go ahead.
Hey, good morning, guys. Hi, Amit. Good morning, Amit. Scott, can you step back and talk about the cycle as you see it? You haven't recorded $1,100,000,000 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 on this level of bookings for the next few quarters? And how much of a higher level of bookings has actually come here could come from self help with the initiative that you have such a strike zone in commercial intensity?
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 Q1 would be more of that North American MRO business. And so this is primarily the distribution network that services some of the more of the upstream markets, but also some of the midstream.
And that's where we've seen a slowdown. And you can see that in our general industries category where our bookings were down 12% year over year. But I'd say that's where we're putting the most focus on transformation. 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.
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 impacted margin in the segment, but you just said General Industrial Business 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 twenty nineteen?
Yes. 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 in our OE business and that's the slower MRO work that comes through the North American distribution. And so it's not showing an aftermarket, it's 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 products it is, which facilities. And unfortunately with North American distribution, there's just a lot of products on the shelves 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 to probably 2020 as the inventory levels start to get down.
Got it. Thanks.
Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead.
Scott, would love to follow-up on Andy's questions and this whole sort of industrial short cycle pressure has 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 in the expectations for the channel. What might be helpful is how did it progress during the quarter? And then any commentary about July?
And if I could start there. Thanks.
Sure. I'd say 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 just it did not improve at the rate that we were expecting. I don't want to give any color on July or Q3 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's things that are going to have to move forward with. And so it comes back and it's just more a question of timing. And for us, probably the biggest single thing is just inventory on the distributor shelf.
And so we get good visibility with our partners and their inventory levels. And as we start to see that come down, our bookings will increase here and we'll start to generate revenue pretty quickly because it's very short cycle work.
That's real helpful. And given that bookings were one of the positives here in your results, I'd love to hear more color on this large LNG project because it does sound like the perfect win here. You had pumps, valve 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?
Yes. So unfortunately, I can't speak to the details because our customers don't haven't allowed us to do that yet. Hopefully, we'll get a press release out on this shortly. But what I would say is, 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 valves, 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 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.
Yes. So congrats to the team on that one. And just a clarification and then last one for me is, can 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?
Yes. So ideally, we would love to sign like on a greenfield facility, ideally, we would love to sign the long term lifecycle agreement while we're in the process of negotiating the front end valves. We haven't done this on this award, but what I 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 and 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 size on both pumps and services in this facility.
Congrats. Thank you very much.
Our next question comes from Nathan Jones from Stifel. Please go ahead.
Hi, good morning. This is Adam Farley on for Nathan.
Okay. Hi, Adam. Good morning.
So you sound pretty confident in this late cycle project work. Could you just provide a little bit more color along the lines of the long of the late cycle projects? We have heard from some companies that projects are starting to slip to the right. Maybe 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?
No, I think 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 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.
All right. That's helpful. And then just turning to free cash flow and working capital. You made some improvements there. Just try 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?
Yes, I'll start and then I'll let Lee do 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, leads leaving that or leading that and we're seeing good progress there. What I would say both in inventory receivables is just the fragmented nature of Flowserve and just the disparate locations that we have has made this incredibly challenging. But we're starting to make good progress 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, you want to add anything on what we're doing on receivables? Yes.
Just to 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 at 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 Flow Service, try to consolidate our collections work. I would say beginning of the year, we had roughly about 30% of our collections work 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 on 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 process of building much better Power BI tools around understanding what is late, providing that information to our sales organizations, which we didn't have in the past and saying, here are the customers that are delinquent or have issues with us that are 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 with the shared services, we expect to also improve that performance.
All right. It's really helpful. Thank you.
Thank you.
Our next question comes from John Walsh from Credit Suisse. Please go ahead.
Hi, good morning.
Good morning, John.
I guess just
a question around pricing. You've been talking about positive momentum on the aftermarket side the last couple of quarters. 1 of your European competitors actually mentioned some capacity tightening. So just wanted to get your view on the pricing landscape and kind of what your view is on if we're actually starting to see industry capacity tighten a little bit?
Yes. So it's really not a lot of different than my commentary in Q1. And so we hit our pricing very early in the year, right. So we actually started in December and we did a second price increase kind of late Q1. And so for 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's 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 valves, I think we're going to see more people get more discipline in that project pricing. But honestly, in Q2, I think it was still pretty competitive on the larger 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 projects. 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 through the back half of the year and through the transformation work stream.
Great. And then maybe a follow on for Lee around free cash flow. The last couple of quarters, you've been talking about this kind of 75% plus conversion. Is that still the right bogey? And anything to call out in terms of cadence in the back half?
Sure. So just to remind everybody, so free cash flow in the first half of the year was $24,000,000 which was up $113,000,000 versus prior year. Improving working capital, quality earnings, free cash flow conversion is a high priority for the business. As I mentioned on the last call, we had really strong Q1 cash flow, but a benefit from some accrual timing that reversed out in the second quarter. But we were really pleased with our $113,000,000 improvement in the first half of the year and we've got really good line of sight to that 75% conversion.
Great. Thank you.
And our next question comes from Joe Giordano from Cowen. Please go ahead.
Hey guys, good morning. Hi Joe. I just wanted to clarify something you said on FCD margins. You said like 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 you talking year on year?
Because obviously that's a business that's stepped up materially in the second half typically. And if we look at last year back half something like high-eighteenslow-nineteen. So how should we think about second half in that business year on year?
Yes. So from the Q2 gross margins, we don't expect gross margins to go down from where we are right now. And the progression there really depends on how North America responds and if we're able to get more products through our distribution in that general industries category. And so right now, we feel reasonably good that it steps up in Q3 and Q4, but I think it is dependent on the activity that we see in North America.
Okay, 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? Does that step up to compensate in the back half? Or how should we think about that?
Yes. So this is Lee. So as my prepared remarks, we are focused on driving SG and A down as it's about $100,000,000 of cost that's unallocated. It represents legal costs and board costs and CEO costs. And that number does bounce around from quarter to quarter.
But overall, we expect it to be roughly around $100,000,000 for the year.
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 valve 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 projects?
Sure. I think through the power of the pure play, that's absolutely how we raise the content. And so if we can get valves pulled in and get seals locked in, then we're doing really good things there. The other thing is just expanding the portfolio through our R and 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.
Thanks guys.
Our next question comes from Walter Liptak from Seaport Global. Please go ahead.
Hi, thanks. Good morning.
Good morning, Walter.
I wanted to ask an LNG question too. And it's good that you've got some LNG projects that are moving forward. And I wonder if you could maybe give us some insight 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 is, 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?
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 $10,000,000 of awards. And we would get a pump award or just a valve award in that kind of $8,000,000 to $10,000,000 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 $30,000,000 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 upfront 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.
Okay. All right. Sounds good. And then, I guess, just switching gears to the pipelines, the midstream. And is that where you were talking about in the Q3, Q4, 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?
Yes. Let me just I'll talk a little bit about Q2 and then I can go into kind of the back half of the year. We received a really nice award here in North America on a crude oil pipeline. We're very excited about it. It's a big number for us and it's a flagship award to really get us back into the interstate or the large pipeline work.
So thus far, we launched this initiative about a year ago and we've booked $120,000,000 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 $20,000,000 $25,000,000 range, but we've got a lot of activity in the $5,000,000 to $10,000,000 range and our outlook for Q3 and Q4 remains robust in midstream. I do believe that starts to slow down in 2020, but certainly for the next two quarters, we feel good about midstream pipeline.
Okay. All right, great. And okay, I'll take the rest offline. Thank you.
Great. Thank you.
Our next question comes from Brett Linzey from Vertical Research. Please go ahead.
Hi, good morning all.
Hi, Brett.
Hey, just want 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?
Yes. I'll let Lee walk through our revenue guidance here in the back half.
Yes. So just to answer your question directly, we're now expecting around between 60% 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% 65%. And then the book and burn is the balance and right now it's pretty much flat year over year.
So we feel good about our revenue guidance. If we can we should be able to convert the backlog and get the same amount of book and burn that we've had historically.
Okay, great. And then just thinking about the Q4 to Q3 to Q4 progression, from a growth standpoint, but also margins, anything to be aware of from a modeling standpoint and the way OE versus aftermarket mix hits both those quarters?
Sure. I'm glad you brought that up. So just to remind everybody, we remain highly focusing on 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 Q1 call and discussed in my prepared remarks, we expect the sales mix the rest of the half of the year to shift towards the OE and the project work with the strong bookings that we have. And so the result is that we're going to see an increase in OE sales, which can 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 Q1 where we had a heavy aftermarket mix.
And is that a Q3 comment or just kind of the back half as a whole?
I would say it's the back half.
Okay. And then just one quick follow-up. Could you just put a finer point on what the size and scope of the large projects were in the quarter? I think you mentioned a few were in the $20,000,000 range. Could you just quantify that?
And then just any visibility on the timing when those let out?
LNG award was right at $30,000,000 Our big midstream pipeline award was above $20,000,000 And then we had a nice concentrated solar power award in the Middle East that around $20,000,000 as well.
Okay. Great.
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. Okay. I appreciate all the
Our next question comes from Steven Fisher from UBS. Please go ahead.
Thanks. Good morning. Good morning. 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 $10,000,000 to $15,000,000 range after this big $20,000,000 to $25,000,000 range.
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 your customers are already telling you this or is it just sort of assumption that, hey, it's going really well this year, it's bound to slow down?
Yes. No, that's a great point because I probably didn't answer that 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 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 so for us, we've got visibility in Q3 and Q4 on midstream work. It's all again kind of that $10,000,000 to $15,000,000 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 though, there still needs to be pipeline build out certainly in North America and then other parts of the world. And so I would expect international necessarily 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.
On the MRO piece in North America tied to oil and gas directly or indirectly? And so is there any assumption that that would have to pick up in the Q4 to kind of get your FCD margin back up?
Yes. 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 markets. And so we need oil and gas to pick up in the back half of the year on the more of the upstream side. As that happens, we start to move up in our bookings and certainly in our revenue because it's such a short cycle business there.
Got it. Thanks a lot.
Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.