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Flowserve Corp (NYSE:FLS)
Q4 2019 Earnings Call
Feb 18, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to Flowserve's Fourth Quarter Year Ending 2019 Earnings Call. My name is Paulette, and I will be your operator for today's call. [Operator Instructions] Later, we will conduct a question-and-answer session. [Operator Instructions]
I will now turn the call over to Mike Mullin, Director-Investor Relations. You may begin.
Mike Mullin -- Director-Investor Relations
Thanks, Paulette. And good morning everyone. We appreciate you participating on our call today to discuss Flowserve's fourth quarter and full year 2019 financial results. Joining me this morning are Scott Rowe, Flowserve's President and Chief Executive Officer; and Jay Roueche, Interim 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 February 18, 2020 and they involve risks and uncertainties, many of which are beyond the Company's control. We encourage you to fully review our Safe Harbor disclosures and the reconciliation of our non-GAAP metrics to our reported results, both of which are included in our press release and earnings presentation and are available on our website at flowserve.com in the Investor Relations section.
I'd now like to turn the call over to Scott Rowe, Flowserve's President and Chief Executive Officer for his prepared comments.
R. Scott Rowe -- President & Chief Executive Officer
Great. Thank you, Mike. Good morning everyone and thank you for joining today's call. Flowserve's fourth quarter marked a strong finish to 2019 as we exceeded our initial full year expectations and continued to make significant progress with the Flowserve 2.0 transformation. I first want to let our Flowserve associates and leaders know how much I appreciate their efforts and contributions in 2019. We have asked a lot from our team, and they continue to rise to the occasion. Despite the challenges in 2019, our team delivered on our performance improvement program, continued to support our customers and created value for our shareholders. Since initiating our transformation strategy, our employees have demonstrated increasing ownership of the program, and our overall employee engagement has reached the highest level since I've been at Flowserve. I'm confident that we are building a culture of accountability, respect and trust as we drive sustainable improvements and create an enterprise capable of performing in any market environment.
Before turning to our results, I would like to talk briefly about China and the coronavirus situation. We have 780 associates based in China and our number one focus is their safety and that of their families. We are actively monitoring the situation and working closely with governmental health organizations in all of Asia Pacific to ensure we keep our workforce as safe as possible. We have a large manufacturing complex in Suzhou, which is about 450 miles east of Wuhan. Additionally, we have several smaller QRCs in the region as well as sales and administrative offices. All of our Chinese facilities are now operational and back to work after a government mandated extension to the Lunar New Year holiday. We also have a large supplier network in China that provides products to our global Flowserve operations. These suppliers have also been impacted by the virus in the mandated quarantines throughout China.
While we have a flexible global supply chain, we do expect that the extended shutdown in China will have some impact on near-term supplier deliveries. We do expect the situation in China to have an impact on our ability to support our customers and defer some revenue in the first half of this year. Finally, we believe this epidemic will have a short-term impact on the demand for our products and services, but it's still too early to tell the magnitude at this time. We are fully focused on doing everything we can to minimize the impact of the situation.
Let me now turn to the financial highlights for the fourth quarter and the full year. Flowserve delivered fourth quarter adjusted EPS of $0.66 and $2.20 for the full year at the high end of our revised guidance range and a 26% improvement over full year 2018. The quality of our earnings continued to improve as transformation and net realignment charges of $36 million in 2019 represent a $59 million decrease versus prior year. Operating margins were roughly flat in the fourth quarter year-over-year, reflecting the higher sales mix of original equipment and larger project work. Our original equipment bookings growth rate of 13% in 2019 was more than four times greater than our aftermarket bookings growth rate. On a positive note, this outsized growth in OE bookings will continue to drive growth in aftermarket for years to come.
On a full year basis, gross and operating margins improved 100 basis points and 150 basis points respectively, as the progress of the transformation initiatives more than offset the mix challenges. We continue to target significant opportunities to drive further margin improvement through lean focus productivity initiatives, design-to-value product cost reduction, improved manufacturing planning, supply chain management and G&A cost control. Our continued focus on cash flow improvement drove Flowserve's free cash flow conversion to 85% of our adjusted net income, a significant improvement versus 46% in 2018. On a GAAP basis, our cash conversion was 97%. Increased operating income reduced realignment and transformation spending, improved working capital management and disciplined capital spending, all contributed to the increase in our cash flow.
Moving now to our segments. FPD continued to drive operational improvements in the fourth quarter, reflected by solid operating leverage on a 11.6% sales growth. Despite a 3% mix shift toward original equipment and increased project work, our transformation -driven productivity improvements drove adjusted gross and operating margin improvement of 60 basis points and 50 basis points respectively. For the full year, FPD delivered an impressive $70 million improvement in adjusted operating income on $83 million of increased revenue. Full-year bookings growth of 9% drove a 21% increase in backlog, positioning FPD well for revenue growth in 2020.
Turning now to FCD. Fourth quarter bookings and operating results continued to be impacted by the North American slowdown in short cycle MRO activity and slower distribution orders. Despite the resulting mix shift toward lower margin OE work, I'm pleased with the team's cost control focus, which held adjusted operating margin declines to 60 basis points and 40 basis points for the fourth quarter and full year respectively. FCD's fourth quarter sequential performance was encouraging where they drove an $11 million increase in adjusted operating income on $15 million of increased revenue and adjusted gross and operating margin increases of 200 basis points and 260 basis points respectively. FCD's fourth quarter constant currency bookings were down approximately 5% year-on-year, but were roughly flat for the full year and up from the third quarter. The decrease was primarily driven by chemical and general industries, which included distribution bookings. Partially offsetting the declines was a 37% increase in power bookings year-over-year, including a $12 million award in Asia Pacific. We expect the North American MRO bookings to remain challenged in the first half of 2020 and return to growth in the second half of the year.
Turning now to our consolidated bookings in served end-markets. Fourth quarter bookings increased 0.7% to $1.050 billion or 1.7% on a constant currency basis. Given the increased market uncertainty during the fourth quarter, we were pleased to achieve the seventh consecutive quarter with both bookings over $1 billion and year-over-year bookings growth. FPD's original equipment bookings increased nearly 13%, which drove our overall growth and was primarily driven from mid and downstream oil and gas and chemical markets. The quarter included one refinery award, north of $30 million and a number of smaller projects and upgrade work in the $5 million to $15 million range. While uncertainty in the macro environment continues to dampen overall demand and delayed funding for some large projects, our discussions with customers as well as the reported capex budgets indicate that energy infrastructure projects will progress in 2020. We continue to expect moderate growth this year primarily in downstream oil and gas, LNG and chemical markets. For the full year 2019, our bookings increased approximately 9% on an organic basis, driven primarily by 13% growth in original equipment bookings. We expect our transformational growth initiatives such as strike zone and commercial intensity to drive market share gains in the current environment. Additionally, through the power of the pure play, we believe we can build upon our comprehensive flow control portfolio and provide more complete solutions to our customers.
Turning to aftermarket. Fourth quarter constant currency bookings decreased 1.8%. There was a tough compare period as the 2018 fourth quarter represented the highest level of aftermarket bookings at Flowserve since 2014. However, on a sequential basis, our aftermarket bookings grew 5% for the full year. Constant currency aftermarket bookings grew 2.9% on FPD's 4% growth. Our commercial intensity program continued to gain traction and grew our share of customers' maintenance spending. We expect 2020 to provide an opportunity to continue to grow our aftermarket franchise through the combination of larger installed base, our customers' increased focus on efficiency, supportive regulatory changes and execution of our proven growth initiatives.
Let's now turn to our end markets starting with our largest market, oil and gas. Fourth quarter bookings increased 6% year-over-year, including about 1% negative currency impact, driven by mid-single-digit growth in both FPD and FCD. The quarter included the previously mentioned refining award of over $30 million and several smaller project awards totaling roughly $70 million, including LNG, midstream pipeline and downstream oil and gas projects across Asia Pacific, the Middle East and North America. For the full year, oil and gas bookings increased approximately 11%, driven by FPD's 14% growth. On a constant currency basis, chemical bookings were roughly flat in the fourth quarter with FPD's 20% growth offset by FCD's 22% decline. Activity in the Gulf Coast continued where FPD captured a small project and we continue to see a pipeline of future opportunities. For the year, bookings increased 4% on FPD's strong 10% growth. The downstream outlook for 2020 looks solid based on capex projects and the forecasted global demand that's expected to continue to drive investment in Asia, the Middle East and North America.
Our power markets provided opportunity in the quarter with bookings up 13%, including a concentrated solar power project award of $12 million in Asia Pacific. Following years of decline in our power markets, 2019 delivered 10% bookings growth with FCD contributing 19%, while FPD was up 6%. Although we are not forecasting this type of growth in 2020, we will continue to support our global fossil fuel and nuclear installed base with maintenance, upgrades and life extensions and look to participate in fuel switching opportunities in North America and Europe, as well as limited new build projects primarily in Asia. As we saw in the quarter, concentrated solar power continues to provide opportunities in the renewable arena where Flowserve offers a differentiated set of products across our pumps, valves and seals.
General industries and specifically distribution continued to face headwinds from the MRO slowdown in North America. Fourth quarter bookings decreased 8% year-over-year, driven by FCD's 13% decline with FPD down 5%. As a reminder, roughly 40% of FCD's bookings come through distribution. In addition to the impact from distribution destocking, we also saw decreased bookings in other general industry markets, including mining, marine, pulp and paper, and food and beverage, while our agricultural markets contributed solid growth. For the year, general industry bookings were down 7%, driven primarily by distribution, mining and marine markets.
Finally, representing our smallest market, water bookings decreased 29% in the fourth quarter, while full-year 2019 marks third year in a row of low-single-digit bookings growth. We continue to view this market opportunity positively with a solid pipeline of desalination in water management projects on the horizon.
Turning to fourth quarter bookings by geography. Europe delivered 17% growth with Asia Pacific and Latin America contributing growth of 11% and 8% respectively. North America and the Middle East and Africa were both down roughly 9%. For the full year, bookings increased in all regions, other than Europe 6% decline. The Middle East and Africa increased 24% with the remaining regions growing in the 5% to 8% range.
I'll now turn the call over to Jay to cover our financial results in greater detail and then, I'll return for some closing remarks before we open up the call to Q&A. Jay?
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Thank you, Scott. Good morning, everyone. We are very pleased with our solid finish for the year. As Scott highlighted, we delivered adjusted earnings per share of $0.66 in the fourth quarter, which brings our full year adjusted EPS to $2.20. This performance exceeded our initial guidance given last February and reached the high end of our revised guidance range that we provided after the third quarter. Importantly, the quality of our earnings improved significantly during 2019.
Flowserve's reported full-year EPS of $1.93 represented 88% of our adjusted EPS compared to just 52% in 2018. On a reported basis, fourth quarter EPS increased 10% to $0.53 and included realignment, transformation and voluntary retirement expenses of $0.08 as well as $0.05 of below-the-line currency impacts.
Fourth quarter sales of $1.07 billion increased 8.2% versus the prior year or 9.3% excluding the impact of foreign exchange headwinds. It was our highest quarterly level of revenue in two years. The fourth quarter sales increase included strong OE and aftermarket growth of 11.3% and 5.3% respectively. FPD was the primary contributor with OE and aftermarket growth of 22% and 6% respectively. For full year 2019, revenues were $3.9 billion, an increase of 2.9% compared to 2018 and in line with our most recent 2019 guidance. Excluding currency and divestiture headwinds, the increase for the full year was 6.2%.
Turning now to our margins. Fourth quarter adjusted gross margin decreased 50 basis points. FPD's 60 basis point increase was more than offset by FCD's 150 basis point decline. For the full year, however, adjusted gross margin increased 100 basis points to 33.3%, which includes FPD's 230 basis point increase from transformation-driven topline, operational and productivity improvements. Partially offsetting FPD's strong full-year performance was the 120 basis point decline in FCD's adjusted gross margin. FCD managed the business well in the fourth quarter however, generating a 200 basis point sequential improvement in adjusted gross margins on modest sequential revenue growth. Mix continued to be more heavily weighted toward project work as MRO and distribution headwinds persist, as Scott mentioned earlier.
Flowserve's full-year incremental margins were substantial as adjusted gross profit increased $75 million on just $112 million of sales growth. On a reported basis, Flowserve's fourth quarter gross margins increased 10 basis points to 32.7%, primarily due to $7 million of lower realignment expense versus prior year. Full-year reported gross margin improved 180 basis points to 32.8%, driven by FPD's strong performance, other transformation initiatives and a $26 million reduction in realignment expenses. Fourth quarter adjusted SG&A as a percent of sales declined 60 basis points year-over-year to 21.6%. On a reported basis, SG&A as a percent of sales also decreased 60 basis points, primarily due to tight cost control as realignment and transformation expenses were roughly flat year-over-year. On a full year basis, adjusted SG&A declined 50 basis points as a percent of sales and reported SG&A expense declined $44 million in 2019 and was 180 basis points lower as a percent of sales compared to the prior year.
Fourth quarter adjusted operating margin decreased 10 basis points to 11.8% as FPD's 50 basis point improvement was essentially offset by FCD's 60 basis point decline. Again, the mix impact is the primary reason for the variance. For the full year, however, adjusted operating margin increased 150 basis points to 11.3% behind FPD's strong operating leverage. Reported fourth quarter operating margin increased 60 basis points, while for the full year, reported operating margin increased 380 basis points to 10.3%. Our adjusted tax rate for 2019 was 24.8%, which was modestly better than our last revised guidance range of 25% to 27%.
Turning to cash. Our cash flow from operations was again seasonally strong during the fourth quarter at $169 million. The quarter accounted for half of our full-year operating cash flow of $313 million. The keys to this $122 million year-over-year increase were our strong earnings improvement, lower realignment and transformation outflows and our continued progress on working capital. In total, our cash flow from operations improved by over 60% compared to 2018. Flowserve's full-year free cash flow of $247 million increased over 130% year-over-year. Our performance generated free cash flow conversion representing 97% of our reported earnings and 85% of our adjusted earnings. Like 2018, we maintained a disciplined approach to our capital expenditures and kept the total spend of $66 million in 2019. While we still have work to do on our cash conversion, we do feel very good about the progress toward our longer-term targets.
A key component of our cash flow improvement is the demonstrated incremental progress we have made in working capital management. For instance, in the fourth quarter, we delivered five days of DSO improvement compared to the 2018 fourth quarter. And we have driven eight days of improvement versus the 2017 fourth quarter. Inventory has shown progress as well with turns of 4.3 times in 2019 versus the 2017 level of 3.3 times. We will very much remain focused on driving sustainable systemic improvement within our inventory and cash -- order-to-cash processes, as we drive toward our long-term goals. And we fully expect to make further progress in our working capital position in 2020.
Flowserve finished 2019 with a cash balance of $671 million, up $51 million over 2018 and up $124 million against the 2019 third quarter. During the year, we paid down $105 million of debt, and we returned $115 million to shareholders through dividends and share repurchases. In addition, we invested $66 million in our business through capital expenditures. This amount was less than originally planned, but we ensured that our focus was on the right value-added investments that have enterprisewide applications like IT systems. Lastly, we also contributed $37 million to our pension plans, keeping the US plan fully funded.
Turning now to our 2020 outlook. We are targeting full-year adjusted EPS of $2.30 to $2.45 on an expected revenue increase of 3% to 5%. We are not expecting any material currency impacts at this time. The adjusted EPS target range excludes expected realignment and transformation expenses of approximately $40 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, special initiatives, tax reform laws, etc. Our outlook assumes the transformation initiatives, combined with volume, price and productivity improvement, were more than offset the expected incremental headwinds due to the original equipment mix shift, inflation, merits and the planned increase in research and development and IT investments. Both the reported and adjusted EPS target range also assumes current foreign currency exchange rates and commodity prices. Our expectations are based on our 2019 year-end backlog, anticipated bookings levels and the continuation of current market conditions.
We further expect that net interest expense will be in the range of $45 million to $50 million, and we'll have an adjusted tax rate between 24% and 26%. In terms of phasing, as many of you know, Flowserve's results are normally back-half weighted because of seasonality. In 2020, we expect more second half weighting than usual, due to the uncertainty that currently exists in China and the associated potential headwinds that will likely persist from it for the next several months. And as Scott noted, we will very much continue to monitor the situation in China closely. From a 2020 cash usage perspective, we expect to return approximately $100 million to our shareholders through dividends. Our current estimate for capital expenditures is in the $90 million to $100 million range. But like prior years, we will continue to be prudent with our capital spending and will reevaluate planned investments throughout the year. We also expect to repay the modest amount of debt coming due in 2020 and plan to contribute the equivalent to our service costs in our global pension plans. And finally as a reminder, our cash flows during most years are also very seasonal and back-half weighted as they were in 2019. Traditionally, and in 2020, we expect to use cash in the first half of the year and to be cash flow positive during the second half, primarily in Q4.
Closing out, we anticipate maintaining a very active Investor Relations calendar again in 2020. Mike and I are headed to Florida later this week for Citi's Global Industrials Conference. Then Scott and I will be in Canada later this month, visiting with current and potential shareholders there. And we'll close out February at the Gabelli Pump, Valves & Water Symposium in New York City. We very much value our time with our shareholders and investors, and we look forward to seeing many of you during the year.
With that, let me turn the call back to Scott for his closing remarks.
R. Scott Rowe -- President & Chief Executive Officer
Great. Thank you, Jay. I'd like to wrap up by spending a few minutes talking about the journey that we have been on over the last three years at Flowserve and how the transformation will continue to provide support in 2020. I'll start with the progress we've made since 2017. Following three consecutive years of sequential revenue declines, Flowserve returned to growth in 2018 and '19. And we fully expect this trend to continue in 2020. Our year-end 2019 backlog is up 14% compared to prior year, which provides a solid starting point for 2020. While each of the end-markets had unique cyclical characteristics, overall, we believe that some of our customers' capex budgets will be flat to slightly increased over 2019 levels. Beyond the market, we also expect further results from our growth-oriented transformation initiatives, which have driven outperformance in the prior two years. We have also delivered better margins through significant improvements in our global operations and better cost management. Over the last two years, we have driven strong margin improvement on modest revenue growth. Our adjusted gross and operating margins have increased 190 basis points and 200 basis points, respectively since full-year 2017.
Our focus on working capital improvement has driven 100 basis point decline as a percentage of sales in a growing environment. The combination of growth and margin improvement has restored Flowserve's return on invested capital to a reasonable level, which is now up 530 basis points from 2017. What is most promising is that we have substantial opportunities ahead of us to continue to build on the momentum that we have created in the last three years. It was clear to me in my early days at Flowserve that the transformation would also need to focus on the culture and the organizational health of the Company. The transformation has created an aligned plan, improved communication and provided a voice for our associates.
I'm confident that we are making significant progress with our culture. Our employee engagement scores are at all-time highs. Our voluntary attrition is down significantly. And we are attracting top talent in the marketplace. As our 2020 guidance indicates, we are expecting another year of growth, further operating improvements and continued progress toward our long-term targets. Since 2017, our adjusted EPS has grown over 60% or 25% annually. Based on our solid backlog, project pipeline, market outlook and the continued traction of our transformation initiatives, we fully expect that we will deliver solid adjusted earnings growth in 2020. The Flowserve 2.0 transformation very much remains the catalyst to driving our improved results in 2020. I'm extremely encouraged by the progress we have made to date and the opportunities that remain ahead of us. With solid growth the last few years and steady margin improvement, we feel optimistic with where we are. And I believe we are on the right path to achieve the longer-term targets we introduced in December of 2018.
In addition to the improvements in the income statement metrics, we've made great progress in our free cash flow conversion, and our 2019 return on invested capital grew to nearly 13%. While we are pleased with the performance to date, our transformation efforts in 2020 do involve some heavy lifting. The dedicated transformation office will remain in place throughout this year as we continue to drive a sustainable process improvement culture deep into the enterprise with further manufacturing improvements, product design-to-value, supply chain improvement and G&A cost reductions. We will wind down the designated transformation team at the end of 2020 as our functional leadership continues to assume greater responsibility and ownership of the program. I'm confident that we will continue to capitalize on the great progress that we have achieved to date. We are moving Flowserve to a higher level. And I have no doubt that this will be reflected in our metrics, our service levels to our customers and value creation for our shareholders.
Operator, we have now concluded our prepared comments, and we would now like to open the call to any questions.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrew Kaplowitz from Citi. Please go ahead.
Andrew Kaplowitz -- Citigroup -- Analyst
Good morning, guys.
R. Scott Rowe -- President & Chief Executive Officer
Hey, Andy.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Andy, good morning.
Andrew Kaplowitz -- Citigroup -- Analyst
So Scott and Jay, good execution this quarter, but I just want to focus on your comments that you still see modest bookings growth in 2020 led by refining, chemical and LNG. How much of that confidence comes from all your self-help initiatives and then, your project pipeline last quarter, I think, was down a little bit. If you continue to drop a little in Q4 given macro uncertainty or did it stabilize at this point?
R. Scott Rowe -- President & Chief Executive Officer
Yeah. Sure, Andy. I'll take this one. We are still committed to growth, but obviously the marketplace is remaining highly volatile and certainly, the impact of the coronavirus is not going to help. I'll just kind of hit a couple of things that you talked about. First, the project pipeline, what we're seeing in Q1 is relatively stable from what we saw in Q4, which as you said, was slightly down from a year ago, but it's still incredibly healthy. And so for us, it's more about the ability to win selective projects that are out there. We had a nice project awards in Q4. We've got visibility to project awards in Q1 and that pipeline across the downstream space. LNG is -- we've got a lot of opportunities in the LNG spot and in the midstream spot as well.
And so, we feel really reasonably well about the project side and the project bookings. I'd say the big challenge, the one we faced in the back half of last year is our MRO bookings in that book-to-ship business. And so, that's the one we're watching carefully. It's primarily North America. And I just with the distributor destocking, I expect that to pivot to growth, but that turn to growth is now continuing to move out. I was thinking probably earlier in 2020 a month or two ago. And now, it would be probably more in the second half of 2020.
Andrew Kaplowitz -- Citigroup -- Analyst
That's helpful, Scott. And maybe the follow-up would be around margins and the impact of all of what you just talked about. So if I look at 2020, it looks like you have relatively modest margin improvement in 2020 at the midpoint of your range. Maybe you could just talk about the puts and takes you see on that 2020 margin and you have the self-help initiatives a tailwind, maybe price versus cost. You did put a yellow check on your progress toward the 15% to 17% margin goal. So how do we think about that longer-term goals? It's been a little harder in this environment where you've got these mix headwinds and maybe modestly lower growth. Maybe you can talk about that.
R. Scott Rowe -- President & Chief Executive Officer
Sure. Let me talk about the 2020 guidance first. And as you alluded to, the challenge here is the headwind mix, right? It's the aftermarket versus the OE and in my prepared comments, I talked about the OE growth being four times higher than that of the aftermarket. And just quite frankly, we didn't anticipate it when we put our long-term targets out. And we really didn't anticipate the magnitude of the impact when we put our 2019 guidance out. And so, that headwind of the margin differential between OE and aftermarket is really what's holding the margins back. We feel confident in our ability with transformation to continue to move our margins up, but overcoming the headwind a mix is becoming a challenge. And so, that's why 2020 is probably a little softer and we're not showing the improvements that we made to '19 -- from '18 to '19, but at the same time, we're still committing to margin growth.
And then let's switch to the long-term target. The yellow check mark on operating margins is just a recognition that if you did a linear kind of mapped to the 15%, we're a little -- we're below what that expectation is. And like I said previously, we did not anticipate the mix changing so dramatically when we laid out the operating margins, but at the same time, we're not given up on this. And so, we still believe we can get to 15% OI margins. We just -- unfortunately, it's not going to happen in 2020 at the pace that we thought. What we do need to do is just continue to make progress on the transformation. And I'd just say we've got -- I said this in the remarks, we have -- we still have so many opportunities. The manufacturing productivity is moving really well. Supply chain is moving really well. Design-to-value really hasn't made its way into the financials yet, and we see an impact of that later this year and into 2021. So there's still a lot of levers for us to move margins up. We just have to execute on the transformation in our playbook.
Andrew Kaplowitz -- Citigroup -- Analyst
Thanks, Scott. Nice quarter.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Thanks, Andy.
Operator
Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead.
Deane Dray -- RBC Capital Markets -- Analyst
Thank you. Good morning everyone.
R. Scott Rowe -- President & Chief Executive Officer
Hi, Deane.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Good morning, Deane.
Deane Dray -- RBC Capital Markets -- Analyst
Hey, just give a shot out here to Jay for wrapping up the second stint as Interim CFO. So thanks for all your help there, Jay.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Yeah, happy to do it, Deane.
R. Scott Rowe -- President & Chief Executive Officer
Appreciate the recognition there, Deane. He is doing a great job.
Deane Dray -- RBC Capital Markets -- Analyst
Yes, sir. Hey, maybe just a follow-up on Andy's question there on the explanation on the mix, could you -- you've clarified this and our take on this, this is kind of a high-quality problem to have so much OE bookings, but just want to make sure that your degree of confidence and winning the aftermarket, is there any -- you talk about your win rate in the aftermarket, how often the customer chooses Flowserve to replace Flowserve in the market and just what's been your experience there?
R. Scott Rowe -- President & Chief Executive Officer
Sure. It is critically important that we continue to grow the aftermarket. And I'll just -- I'll start with that. And as you said, it is a high-class problem, right? If we're growing both the aftermarket and the OE, then I'm OK growing the OE three or four times as much. We are not OK as if we're losing share. In market -- in aftermarket, we are not growing it. And so, this is a major initiative for us within the transformation.
The biggest kind of program that we have around this is called commercial intensity. And essentially the commercial intensity program is truly defining the market segmentation for aftermarket where our installed base is and making sure we're moving our customers up the value curve of our aftermarket services. And so, we know we have to continue to make progress here. We know there's a bigger prize. I think -- I wouldn't say we lost share in 2019, but it wasn't a great year for growing the aftermarket business for us. So we're doubling down on the program, and we do expect to continue to make progress here in 2020. And if we can do that, then a lot of the financials really start to come up in a much better and a higher -- at a faster rate.
Deane Dray -- RBC Capital Markets -- Analyst
All right. That's really helpful. And I'm glad you're giving us a frank assessment here on that because it doesn't feel like it's just distributor destocking because our experience has been that you get a falloff in MRO and especially in oil and gas and peak oil prices because refiners just run flat out and the delays kind of the service and where you would see more aftermarket. So is that being the expectation here?
R. Scott Rowe -- President & Chief Executive Officer
Yeah, I mean, there is no doubt that operators are getting savvier about what to spend and when to spend it. And so, they're driving cost reductions. They're driving further productivity. And as you said, when they're making good money, they don't back off and stop operations. And so, we did see that in 2019. But there is such a prize here for us Deane, right? Our installed base is significantly large. It's the largest on the pump side. And so, we just need to make sure we're defining those opportunities and our team is really focused on gaining that aftermarket. So I think regardless of the environment through the commercial intensity program and some of the other initiatives that we have, we got to be focused on growing this and getting our entitlement here.
Deane Dray -- RBC Capital Markets -- Analyst
Great.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
And I guess one clarifying point I'd make. Deane, I know you know this, but for other people on the phone, the MRO that's really impacting FCD is showing up as an OE booking as opposed to an aftermarket booking.
Deane Dray -- RBC Capital Markets -- Analyst
That's a good clarification. And then, just as a follow-up, when I look at the 2020 assumptions, the capex increase kind of jumps off the page and how much of this is a catch-up because you said you did less in 2019 than you planned. Where is that going? And just the reflection of this will weigh on your cash conversion and just some considerations there as well.
R. Scott Rowe -- President & Chief Executive Officer
Sure. So just a couple of grounding comments. So we finished the year at $66 million in capex in 2019. That was down from the guidance that we gave at the beginning of the year. We put the guidance out for 2020 at $90 million to $100 million. And I would just say nothing changes here, right? So we have been incredibly disciplined on our capex spending since I've been here. The focus is on enterprisewide IT systems. It's on manufacturing productivity and then, a little bit on just the safety and the upkeep of the facilities themselves. We will continue to be very judicious and scrutinized the capital that goes out to our operating entities. I would expect that this range is -- it's a good range and what it is more -- moving more money into the enterprisewide IT systems. I'd just say last year, quite frankly, we clamped down at the end of the year, just because we hadn't progressed the programs as much as we needed to before we were able to release the spending, but really nothing has changed in our thinking. I think $90 million to $100 million is a really good kind of run rate for us as we project forward into the next couple of years.
Deane Dray -- RBC Capital Markets -- Analyst
And just to comment on how that weighs on your conversion?
R. Scott Rowe -- President & Chief Executive Officer
Yeah, I think we factored that into the free cash flow conversion. And we still think 100% achievable even in that range.
Deane Dray -- RBC Capital Markets -- Analyst
That's exactly what I wanted to hear. Thank you.
Operator
Our next question comes from John Walsh from Credit Suisse. Please go ahead.
John Walsh -- Credit Suisse -- Analyst
Hi, good morning.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Hi, John.
R. Scott Rowe -- President & Chief Executive Officer
Hey, John, good morning.
John Walsh -- Credit Suisse -- Analyst
I guess, maybe more of a clarification question to start with, but just looking at your shippable backlog you have for 2020 that you called out in the K, it looks like you have pretty good visibility from what you expect to ship, would seem to imply that the book and burn is down kind of low-single-digits for the year. You obviously made some comments around the timing of your distributor partners and how the channel is going to look, but one is that math right and kind of what are you seeing that would give you that down low-single-digits for book and burn?
R. Scott Rowe -- President & Chief Executive Officer
Yeah, Jay has got our revenue conversion table here. I'll let him take it and then, I'll add any comments.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Sure, John. Now, your math is absolutely right. With our backlog up year-over-year by 14% and with us expecting to convert 88%, 89% of that during the 12 months of 2020, that would suggest that revenue from backlog year-over-year will be up about 12%. And so, for our guidance -- at the high end of our guidance, we're assuming that kind of book and ship, book and burn work would be relatively flat and then for the low end of our revenue guidance at 3% book and burn work could decline at 4%. And clearly, if we see a return in the MRO distributor-type business, that could provide upside to us.
John Walsh -- Credit Suisse -- Analyst
Great. And then you called out kind of the cadence through the year on the H2 versus the H1, just thinking about this first quarter and the coronavirus impact than anything else, I mean is there any other finer point you'd like to put on the quarter just from a modeling perspective, so that we're all dialed in correct on how to think about the phasing of the year?
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Yeah. We'll see how the actual year plays out, but if I were thinking about it, I would probably take the average of 2019 and 2018 phasing and kind of split the difference on that throughout the year.
John Walsh -- Credit Suisse -- Analyst
Got you. Okay. And then, if I could just sneak one more in here.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
A different way to say it is Q1 this year will look a lot like Q1 last year.
John Walsh -- Credit Suisse -- Analyst
Yeah. Got you. Okay. And then, obviously, one of your competitors in the space has taken the opportunity to accelerate some restructuring actions you guys have called out, what you're doing this year in terms of realignment and transformation. But do you feel any sense of urgency to kind of accelerate the plan at all or kind of steady as she goes relative to how you were thinking about the cadence of realignment and Flowserve 2.0?
R. Scott Rowe -- President & Chief Executive Officer
Yeah, John, we are -- since I've been here, we've been focused on cost control and the transformation has. It's both growth and cost initiatives. And so, we've been looking at this from the very beginning. At this point, I'm not going to say we're dramatically accelerating anything, but what you can see in our K and in the press releases, we did do a voluntary reduction at the end of 2019. What I would say -- it was a US-specific program. It was an elegant way to get some folks that were close to the retirement age to voluntary select and move out, and it's the win-win for them and for the Company. So we've done that.
And then last year, we took a lot of actions at the facilities that were impacted by the MRO slowdown primarily in the valve side, but also a little bit in our overall aftermarket organization. So I would say, in '19, we were pretty -- aggressive is probably not the right word, but we were definitely following any slowdown in taking cost actions. I will also add that the realignment spending in 2020, the vast majority of that would be headcount reductions rather than major facility move. So at this time, we're not going to accelerate dramatically, but we're not slowing down on improving our overall cost structure and our cost position. And so, we'll continue to take actions. And I feel pretty good about the level of cost in the organization. And if we need to do something more dramatic or quicker, we've got that fully identified now within the transformation. And as you said, it really is just an acceleration of the plan rather than going back to the drawing board and figuring out where we need to take cost out.
John Walsh -- Credit Suisse -- Analyst
Great. Thank you. Appreciate it.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Yeah, John.
Operator
Our next question comes from Josh Pokrzywinski from Morgan Stanley. Please go ahead.
Joshua Pokrzywinski -- Morgan Stanley -- Analyst
Hi, good morning guys.
R. Scott Rowe -- President & Chief Executive Officer
Hi, Josh.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Good morning, Josh.
Joshua Pokrzywinski -- Morgan Stanley -- Analyst
Scott, just first question on kind of the Flowserve 2.0 initiatives, maybe trying to back into a little bit of it, for 2019, it looks like if you had the gas externally what the amount of discrete savings were from that versus volume leverage, it looks like something in the neighborhood of maybe $30 million. Is that -- it could be right or wrong, but like should we think about kind of a similar level of cost reductions whether it's restructuring or kind of other productivity is being the above and beyond operating leverage type numbers for '20 or is that number grow or shrink?
R. Scott Rowe -- President & Chief Executive Officer
So Josh, we don't disclose kind of how much we're getting from transformation versus other things, but I think your comment on the levels of '19 versus the level of '20 is probably accurate, right? I mean, we've got a very similar plan for 2020 that we had for 2019. And again, we're keeping that the full transformation in place for 2020 and I would expect the same level of savings and results this year as we achieved last year.
Joshua Pokrzywinski -- Morgan Stanley -- Analyst
Got it. That's helpful. And then, on some of these kind of larger projects that are starting to come out of funnels and get booked, LNG probably has got a starting point as any -- I guess, how do you feel about your win rates, anything that we should keep in mind in terms of where your strengths are in product categories that are more or less concentrated and the stuff that is exiting funnels right now, the types of projects being booked, being a Flowserve heavy project or kind of a Flowserve light project?
R. Scott Rowe -- President & Chief Executive Officer
Sure. On the project front, where we do really well is when operators need reliable products for a long period of time in its severe application. So if you think kind of the higher spec refining, the LNG application, the large midstream pipeline where efficiency of pumps is really critical or anything on the isolation of the control side, that's a critical service. And so, a lot of these big projects have categories of really important pumps and valves and in those, we do very well. We're excited about 2020, I would say the refining in the downstream side. There is still more work to come based on regulation in IMO 2020. And so, we've got good visibility to international projects there.
On the chemical and petrochemical side, we believe 2020 grows over 2019. And so, we're excited about that. We see opportunities there in North America and international, in the Middle East and Asia Pacific. On the LNG front, FID probably a little bit lighter than 2019. But for us, we do well with our valves there. We don't necessarily do too well with the pumps. But there are key customers and key opportunities where we feel pretty good about winning our share of business in 2020. So overall, again, our project pipeline looks reasonably healthy. It didn't change in the last three months. And our sales team and the discussions with customers remain optimistic on our ability to win and drive growth here.
Joshua Pokrzywinski -- Morgan Stanley -- Analyst
Perfect. Thanks, Scott.
Operator
Our next question comes from Joe Giordano from Cowen. Please go ahead.
Joseph Giordano -- Cowen and Company -- Analyst
Hey, guys.
R. Scott Rowe -- President & Chief Executive Officer
Hi, Joe.
Joseph Giordano -- Cowen and Company -- Analyst
So I know you don't want to get into some hard numbers on coronavirus, but Scott, maybe can you talk us through like how you thought this -- how you thought about this internally like we have the haircut here on our suppliers getting to us late and we have to discount here for actual demand, changes in projects taking longer and how long you have that bleeding through the model? Just so we can kind of get a sense of, even if we're not getting hard numbers like how the big buckets shaped up for you?
R. Scott Rowe -- President & Chief Executive Officer
Yeah, I can give you two numbers that will help for sure. So first of all, our Chinese operations on a revenue basis account for kind of 3% to 4% of our total revenue. So it's not huge, but it's still -- it's meaningful level of revenue. More importantly, it's the supply chain. So the supply chain is just under 10% of our global supply chain. And so, as we think about disruption and returning to kind of normal operations, I'm confident that we get through this. It's just more where I'm not as confident is the timing of the recovery. Our operations are fully back to work as of last week. We've got about 75% of our people back to work. We expect to get that number up by the end of this week. The supply chain side has just been a little bit the information scarce. Not all of our suppliers are back to work due to the quarantines and the shutdown. And so, I'd say that's where we've got a little bit more uncertainty in terms of the timing of the recovery.
At this point, knowing what I know today, I fully expect for us to catch up by the end of Q2 and then we're normal operations by -- in the second half. And I would love to be a little bit more optimistic on that, but the hang-up is just on the supply chain. And we just don't have a great feel for all of our suppliers and when they come back. Now, we're also aggressively looking at how do we move some of that products into our other geographies and in unimpacted areas. And so, again I feel confident with our global operations. We can ship suppliers. We can ship production if needed, but it is going to have a short-term impact here. Whether it's three to six months, we're saying it's somewhere in that range, but it's not major. I gave you the numbers in terms of magnitude and certainly by the second half of the year, we're back to normal.
Joseph Giordano -- Cowen and Company -- Analyst
So fair to say what you're not doing is having a 1Q impact internally and then assume that things are rocking and rolling back to normal on April 1. That's not...
R. Scott Rowe -- President & Chief Executive Officer
Yeah, I mean our view right now is this goes -- it goes into Q2 and it's primarily the supply chain side.
Joseph Giordano -- Cowen and Company -- Analyst
Okay. That's helpful. Is the current -- is the guidance right now kind of assume that you maintain this streak of $1 billion plus bookings per quarter or is there a risk that 1Q slipped under that number?
R. Scott Rowe -- President & Chief Executive Officer
No, we're still driving to $1 billion a quarter. I think that's $1 billion plus per quarter. I think that's a safe estimate right now.
Joseph Giordano -- Cowen and Company -- Analyst
Great. Thanks guys.
R. Scott Rowe -- President & Chief Executive Officer
And just one more on the coronavirus, our guidance has everything that we know about coronavirus into the guidance now as well. So that does account for anything that we would have anticipated with the impact in China.
Joseph Giordano -- Cowen and Company -- Analyst
Thanks.
R. Scott Rowe -- President & Chief Executive Officer
Thank you.
Operator
Our next question comes from Andrew Obin from Bank of America. Please go ahead.
Andrew Obin -- Bank of America Merrill Lynch -- Analyst
Hey guys. Thanks for fitting me in.
R. Scott Rowe -- President & Chief Executive Officer
Hey, hi, good morning, Andy.
Andrew Obin -- Bank of America Merrill Lynch -- Analyst
Hey, just a question on FCD margins through the year, so just as the comps get easier in the second half of 2020, is it reasonable to assume that FCD margins will start going back up again as you fully sort of incorporated the mix change.
R. Scott Rowe -- President & Chief Executive Officer
I sure hope so. So that's what we're driving to. Obviously, I mean we're at a low point on FCD margins. And so, we are doing a lot of analysis to make sure that we're not doing anything that's impacting the margins from a cost standpoint or labor productivity, but as this thing moves forward and you look at the year-over-year comps, I mean we should be getting better, but the big deal -- as we've talked about, the big driver here is getting the mix shift normalized a little bit more away from the OE and getting that MRO business up. And as Jay pointed out earlier, that MRO business is showing up in OE, so you don't see it in the aftermarket OE split.
Andrew Obin -- Bank of America Merrill Lynch -- Analyst
Got you. So it's just the question is what downward [Phonetic] growth is on OE versus MRO.
R. Scott Rowe -- President & Chief Executive Officer
Yeah.
Andrew Obin -- Bank of America Merrill Lynch -- Analyst
The second question is on cash. Longer term, what are the big levers you still have left in the Company? What are the big buckets to continue to improve cash conversion because I would say that has been one of the most -- along with the margins, but big changes here under your leadership. But what else is left and where do you think cash conversion can go?
R. Scott Rowe -- President & Chief Executive Officer
Sure. I mean, the big driver is still working capital. And I'm pleased with the progress that we've made on working capital, but we're not close to where we need to be. And so, we finished the year -- kind of the endpoint was the 27% and as a reminder, we shifted our incentive plans to focus on the average of each quarter. And so, what we did this year is we did a really nice job at making sure that we are driving working capital down every quarter of the year. So Q1, Q2 and Q3 were all substantially better than last year. And historically, what was happening is we would do really well in December, but every other month in the year, we weren't making progress in working capital. So this year, we did that. And as a result, our cash flows improved pretty dramatically. But we're still at kind of a 27%. And so, we need to take significant steps forward there. And I'm confident that we're making progress. Our inventory velocity improved by about four days. Our DSOs improved -- Jay has got the number.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Eight days.
R. Scott Rowe -- President & Chief Executive Officer
Eight days on DSO. We will continue to make progress as our systems and our visibility to both inventory and receivables gets better. And so, that's probably the number one driver that's going to continue to move cash. We will remain disciplined on capex. And so, I'm not worried about that. And then, if we can continue to expand margins and we've got nice cash flow growth year-over-year.
Andrew Obin -- Bank of America Merrill Lynch -- Analyst
And as we think about the buckets where this working capital is stock, is it a specific geography, is it a specific industry or is it a little bit of everything?
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
It's a little bit of everything, Andy. It's too much inventory in the system. It's too much receivables in the system. And we have opportunities across the globe.
R. Scott Rowe -- President & Chief Executive Officer
Yeah, it really. I wish -- we created at this and we look at every single site now on working capital. I wish there are two or three areas that we can just attack, but unfortunately, it is -- as Jay said, it is across the board. Now the good news is we -- again, we've made really nice progress in almost every location, but it's just been kind of slow incremental progress rather than some big steps, but I firmly believe we continue to make progress here. You'll see another nice movement in 2020 on working capital and that's going to help us with the cash flow.
Andrew Obin -- Bank of America Merrill Lynch -- Analyst
Congrats. Good quarter, guys.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Thanks.
R. Scott Rowe -- President & Chief Executive Officer
Thank you.
Operator
Our next question comes from Brett Linzey from Vertical Research. Please go ahead.
Brett Linzey -- Vertical Research Partners -- Analyst
Hey, good morning guys.
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Hey, Brett, how are you?
Brett Linzey -- Vertical Research Partners -- Analyst
Good. Just wanted to follow up on the -- on China and the coronavirus one more time here, are you assuming in the guide that there is near-term pressure Q1 into Q2 here and then you fully recoup it in the second half or you're contemplating some of that profit actually slips into next year or is it simply a lost sale?
R. Scott Rowe -- President & Chief Executive Officer
No. Brett as our -- we've said in our prepared comments and as we did in the press release, we expect the headwind to be in the first half of the year, which will make the phasing in the first quarter a little bit lighter than normal and then, we expect to be up and running back to normal in the second half of the year and be able to make that up.
Brett Linzey -- Vertical Research Partners -- Analyst
Okay, great. And then just back to free cash flow, so with the pension contribution that you expect in capex stepping back up. And sorry, if I missed this, should we expect the conversion level slightly better than the 85% you did this year given all you're doing on the working capital side?
R. Scott Rowe -- President & Chief Executive Officer
I'm not going to necessarily set out new guidance metrics that we didn't publish already, but very much our focus is continuous improvement all the way through 2022 to where we're hitting in our long-term targets.
Brett Linzey -- Vertical Research Partners -- Analyst
Okay, great. I'll pass along. Thanks.
R. Scott Rowe -- President & Chief Executive Officer
Great. Thank you.
Operator
[Operator Closing Remarks]
Duration: 61 minutes
Call participants:
Mike Mullin -- Director-Investor Relations
R. Scott Rowe -- President & Chief Executive Officer
Jay E. Roueche -- Vice President, Interim Chief Financial Officer, Investor Relations & Treasurer
Andrew Kaplowitz -- Citigroup -- Analyst
Deane Dray -- RBC Capital Markets -- Analyst
John Walsh -- Credit Suisse -- Analyst
Joshua Pokrzywinski -- Morgan Stanley -- Analyst
Joseph Giordano -- Cowen and Company -- Analyst
Andrew Obin -- Bank of America Merrill Lynch -- Analyst
Brett Linzey -- Vertical Research Partners -- Analyst
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Flowserve Corp (FLS) Q4 2019 Earnings Call Transcript - Motley Fool
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