Welcome to the Flowserve First Quarter 2019 Earnings Call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Jay Roueche, Vice President of Investor Relations and Treasurer. Sir, you may begin.

Thank you, Paulette, and good morning everyone. We appreciate you participating in our call today to discuss Flowserve's financial results for the 2019 first quarter. Joining me this morning are Scott Rowe, Flowserve's President and Chief Executive Officer; and Lee Eckert, Senior Vice President and Chief Financial Officer. Following our prepared comments, we will open the call for questions. And as a reminder, this event is being webcast and an audio replay will be available. Please also note that our earnings materials do, and this call will include non-GAAP measures and contain forward-looking statements. These statements are based upon forecasts, expectations, and other information available to management, as of May 3, 2019, and they involve risks and uncertainties, many of which are beyond the company's control. We encourage you to fully review our safe harbor disclosures, as well as the reconciliation of our non-GAAP measures to our reported results, both of which are included in our press release and earnings presentation, and are available on our website at flowserve.com in the Investor Relations section. I would now like to turn the call over to Scott Rowe, Flowserve's President and Chief Executive Officer, for his prepared comments.

Thanks, Jay, and good morning everyone. Flowserve's first quarter results are a strong start to the year. And I'd like to begin by recognizing our associates for their continued engagement and enthusiasm around the significant changes that we are driving within the company. Our associates are leading the Flowserve 2.0 effort to accelerate growth, reduce complexity, and streamline the Flowserve operating model, and we are making great progress. We executed well during the first quarter, delivering $0.44 of reported EPS and $0.41 of adjusted EPS. The transformation costs and below the line foreign exchange impacts, more than offset by net realized benefits. As realignment activities wind down, and lower cost transformation initiatives continue, we expect the size and number of adjusted items to moderate in the years ahead. We fully intend to narrow the difference between our reported and our adjusted results. We will continue to use our Flowserve 2.0 transformation initiatives to drive further operational and productivity improvements company-wide. The actions we have taken thus far were validated by strong year-over-year margin expansion again in this quarter. Adjusted gross and operating margins increased by over 300 basis points in the first quarter. Improving free cash flow is also a priority for us, and I'm pleased with our stronger performance in the first quarter, as compared to a year-ago. The improvement is still primarily attributed to an intense in manual effort, but I'm confident that we're beginning develop the underlying process changes needed to deliver more sustainable and consistent cash flow conversion at higher levels. As many of you know Flowserve and our industry as a whole is impacted by seasonality, and the first quarter is traditionally the lightest of any year. So, I'm pleased with the performance in each of our segments this quarter. We are off to a…

Thanks Scott, and good morning everyone. Flowserve delivered a very good start to the year. Adjusted earnings per share of $0.41 in line with our expectations. On a reported basis, first quarter EPS was $0.44 which included realignment benefit of $0.09, $0.04 of transformation charges and $0.02 of negative below the line currency impacts. First quarter is traditionally our seasonally low quarter in the year, revenues were $890 million, a decrease of 3.3% versus prior year. Excluding approximately 5% of headwinds from currency and divested assets revenues were up about 2% year-over-year. Additionally, this year, only 17% of our first quarter revenue utilized overtime percentage of completion accounting compared to approximately 23% a year ago. This reduction was a result of differences in sales mix between the two periods, disciplined spending on larger projects in progress and the deliberate efforts we made last year to ensure that the new smaller contracts that we booked do not contain terms - terms and conditions that would trigger overtime accounting. Compared to a year ago Flowserve's current backlog has a higher percentage of contracts or revenue will be recognized as work is completed and shipped. As a result of the growth we delivered in recent quarters and aftermarket bookings, aftermarket sales increased for the first quarter by 3.4% or 7.9% on a constant currency basis to $470 million and comprised 53% of our sales mix, which was a 300 basis point increase over last year's first quarter. Now looking at margins. First quarter adjusted margin increased 340 basis points to 33.7%, matching the highest quarterly level since 2015. Both segments contributed to the improvement, with FPD expanding adjusted gross margin by 450 basis points to 33.7% due to continued operational improvements, fewer but higher margin large project POC contracts and progress and a…

Great. Thank you, Lee. As I wrap up, I'd like to spend a few minutes on our outlook in the progress of our transformation efforts. When we formally commence the Flowserve 2.0 transformation program, a little over a year ago. We knew, it's going to be a multi-year journey. We are convinced that Flowserve had a significant opportunity to better serve our customers, our employees and our shareholders. A year into the journey, I'm very pleased with the progress we've made. We have built momentum and have increasingly shifted to a self sufficient internally lead program, while greatly reducing the amount of third-party reliance. We are encouraged by the results that we're starting to see in all areas of the business. Flowserve has improved operationally as demonstrated by four consecutive quarters of increased year-over-year adjusted operating margins. We've driven improvements in our manufacturing productivity, our planning and scheduling, as well as in our supply chain management. Our growth initiatives, combined with an improved market outlook have driven four consecutive quarters of $1 billion plus bookings. As we continue to push the transformation initiatives deeper into our business we are confident that we will build on the results delivered to-date. Perhaps most encouraging, there is still significant opportunity ahead of Flowserve. Much work remains to achieve the 2022 targets that we presented last year, but we are instilling the culture, developing the processes and changing the operating model to create sustainable long-term value. We're making good progress on both the health and the performance of Flowserve. We are still in the early phases of the transformation, and I am convinced, there are significant opportunities ahead of us. Our commitment to Flowserve 2.0 combined with the strong first quarter performance gives me the confidence that we can deliver on our 2019 commitments. Operator, we've now concluded our prepared comments. We'd now like to open the call to any questions.

[Operator Instructions] And our first question comes from Michael Halloran from Baird. Please go ahead.

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

Yes, sure Mike. I'll start and then I'll let Lee fill in because I'll probably miss something here. But I'd say there was a 3% mix shift towards aftermarket in the first quarter. And so that was one thing and that will probably unwind as we go throughout the rest of the year. But what I'd say in the first quarter that we had no major surprises and historically at least as long as I've been here we've had a surprise almost every quarter. And so, we're doing well on execution in eliminating that. Additionally, we're on the positive side of the price cost curve and as I discussed in my remarks, we've now had two pretty substantial price increases in the year, and we feel pretty good about our ability to continue - our ability for that to continue to stick throughout the year. And then we're just more selective on the work that we're taking. And so as we think about what goes into our facilities and what we can execute, we're making sure that we can deliver value when we deliver that work. And then finally, the other thing is that our past due backlog is significantly down from where it was a year ago. And so that was consuming a lot of cost and this incremental cost into that backlog and that's cleared in a much better place the margins are in the good place right now, and we expect to keep a similar result throughout the year. Lee you want to add anything?

Yes. I think you summarized it pretty well, Scott. Our focus is to drive year-over-year margin expansion. And as Scott mentioned, the key drivers as price ahead of inflation, we're driving supply chain savings as part of a Flowserve 2.0, we're executing better on projects such as we're not having surprises like we had in the past. And then we're also winning the right contracts. So we're much more selective in what we're winning and executing on that. But the last item is one, so all those should continue through the rest of the year. The last one is the aftermarket mix. And our expectation is that its going to be more balanced and especially with the significant amount of orders we want and what's in our backlog, we are going to see lot more obviously original equipment through the balance of the year. So while we are driving year-over-year margin expansion, it should not - you should have a conclusion that will lead to sequential margin expansion.

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

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

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

The other side, what we've done this year so far, and then I'll talk about a little bit about the current environment. So we did our price increase earlier this year than we ever have. In fact, we announced it in December and went into effect in the early parts of January. And that was pretty much across our entire offering with the exception of the engineered order products that we build up that cost and then price off the build-up of the costs. We're seeing really good resiliency in the price increase that we issued in the beginning of the year. And that affects all of our business. Right. It seals, it's parts in the aftermarket, it's valves and it's on more of the base product within the pump portfolio. And so that's got good traction. We're seeing good results from that and we expect to continue that throughout the year. In addition to that, what we've done in the engineered order as we started to raise our margin expectations, as we've been able to drive cost out in the execution instead of passing that on to the customers we're capturing that ourselves. And so we're pricing at higher levels than we have in the past and certainly much higher than what we did in the first quarter of last year. And then finally the third piece to this is, there are selective areas where we've got a preferred position or a niche opportunity where we've also added price increases on top of what we've done at the beginning of the year. So we feel very good about where we are on price right now relative to cost, inflation, tariffs and everything else, but there are areas of concern and where it's say the - the areas are primarily the larger projects and for some reason, larger projects attract more attention, and what we're seeing from peer group and competitors is that that gets incredible focus on price reduction and become highly competitive. And so we understand that and what we're going to do is we're going to price our big projects accordingly. We'd love to have some of those in our backlog and in the portfolio, but at the same time, if we can get the price that makes sense to create ultimate value, then we're not going to do those jobs. But there still - it's surprising to me there is still a lot of pressure in large pump projects and in the large more engineered valve projects as well.

But that's - varies much smaller percentage of your portfolio today than historically. Correct?

Absolutely.

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

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

Yes. So Deane, let me start and then I'll let Lee jump in and go into the details here. But we're making good progress on working capital. But this is the area that we continue to talk about right, Flowserve is highly decentralized and trying to get this accomplished across the enterprise is just been incredibly hard work. And so right now, we're doing it with management attention, intensity and a big manual effort. Ultimately, we want to have far more transparency in the ability with an integrated system to do this from a systematic standpoint. And what I'd say is the manual effort is getting good results right, we're down significantly from where we were last year, 32% and now we're at 28.4%, but we still have a long way to go. And this is not our aspiration, in fact, we're fully striving to be somewhere in closer to the 20% mark, as a percentage of revenue. So we know we have a long way to go here. As part of the transformation this is a major initiative, both on the inventory side and the receivable side. But we are definitely getting traction and from a year ago we're in a far better place than we were. And so you'll continue to see improvements here. But it's really going to be slow going until we can really start to have an integrated and more systemic approach to that. Lee why don't you go in a little bit more on the cash flow side and touch on working capital.

Sure. So as I mentioned, a pretty big improvement $160 million driven - $43 million in earnings, $85 million in working capital and about $44 million that I would say is more timing related. So we do expect that kind of bounce back during the year, but as Scott mentioned there is intense focus here in working capital in importance. So, some of the things we talked about in the past is - first things we did is, we made sure everybody was incentivized to focus on working capital. There is not a location you would go to where people are not talking about the progress we're making on inventory and receivables and that wasn't the case before. But the manual effort where we would like to get to are places where we have centralized billing, centralized collection, centralized SKU management system. Today we don't have those capabilities. Right now it's all at our sites. And so right now the manual effort, people are aligned and focused on it, as we said, it's kind of brute force efforts, but we are putting plans and processes in place to centralize, to get scale. I - you will be embarrassed to say that in many cases I invoice - I send invoices by mail, and often it's snail mail. Those should be electronic payments, and so those were some of the things that we need to do to drive the balances down and as Scott said, our goal - our short-term goal is to get to around 20%.

All right.

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

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

Yes, Sure. Well, obviously, it's a dynamic space right now in the industrials full control market. And so we have our ear to the ground and we're watching things evolve and move forward. For us, we are very focused on Flowserve 2.0 and driving that agenda, and getting the results that we need. I'm not going to commit to say, no, third quarter this year, we're ready to go or fourth quarter, but what I'd say is, we are definitely making progress. And so every quarter that we go through, I am more confident that we've got a platform that we can integrate something into. But as we just talked about right, it's still highly manual, and it's not as clean as simple as we would want. And so, as we start to move forward and develop our enterprise wide IT systems, and start to have more consistency in our operating results, then I start to get more comfortable about moving toward the offensive. Now with that said, we've got to make sure that there is a requirement that we are generating value if we were to go outside and look at acquisitions, and so it's got to be financially attractive, we've got to be able to integrate it, almost seamlessly, you have the confidence and the ability to integrate. We'd also still need to maintain financial flexibility. And so we're going to be prudent about what those are, and what is there right now, as we're still very focused on the Flowserve 2.0 agenda. But if we can have a couple more good quarters like we had in Q1, then we get more confidence in our ability to execute and run a bigger business.

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

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

Thank you, Andy.

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

Lee, you want to take this one?

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

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

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

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

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

Sure. On the pricing side, again, I - we've done some really good work and we've been far more sophisticated about how we price and where we have our opportunities than ever before. And so, we're using a lot of data and a lot analytics, and what that tells us is that we've got opportunities in certain areas. And so we're trying to - what I would say is, we're trying to catch up probably to some of our more sophisticated peers on pricing, and so we've done that. And then in addition to that, the backdrop of tariffs and cost inflation, also give us the ability to have true and honest discussions with our customers to say, hey, here's the real environment. I do think there are - we are getting some traction with the peer group and competitors, at the base business and so we are seeing folks lift prices up a little bit. But like I said, earlier, where we still see highly - high degrees of competition is in the more engineered-to-order type projects and the bigger projects, they are attracting more people, and for whatever reason we are seeing significant price pressures on anything in the large project sizes.

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

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

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

Yes, sure. So just a couple of points. First, I'd say the first quarter was roughly in line with our internal expectations, where we recognized less project revenue than last year. At the beginning the year, we had fewer large contracts that qualify for the POC accounting versus last year. Last year, the 606 impact on revenue in the first quarter was $71 million. Unfortunately, the margin on that incremental revenue was really low, was at 9%. The good news is that the margin and the backlog starting this year is clearly better. So the first quarter revenue, the net is that our sales are down, but our margin is up. The third thing - or the second thing I would say is that, as we said in our guidance, we alluded to it, we are still expecting 4% to 6% growth. So if you just do the math, that would expect the 6% to 9% balance of the year revenue growth. Now the good news is that from our perspective is that, if you look at our backlog and you assume a certain conversion or historical conversion, our book and burn is roughly equivalent year-over-year. So that gives us the confidence that we get the sales number, but your point on margins going forward, there's clearly a second half lift as I talked about, between the 6% to 9%, but it's going to have a lot more equipment in it. So that will put some downward pressure versus the aftermarket margins.

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

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

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

Okay. That's hugely helpful.

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

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

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

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

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

Our next question comes from Andy Kaplowitz from Citi. Please go ahead.

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

Yes. And I'd say it's a really good point. And I'd say one of the differentiating factors of Flowserve than the peers is that we do have an adjusted incredibly large installed base. And so this is something that we've got a major initiative and effort within the transformation. We talked about this in December at the Analyst Day, and we're calling it commercial intensity. But essentially, what the commercial intensity initiative is, is looking at a local geographic site that might have two or three refineries in a petrochemical facility and it - how does our local team in that local quick response centers start to get more of our installed base and capture our entitlement to do the aftermarket. And then the other thing that we're doing is we're starting to add services and moving up the value chain with the maturity curve of services. And so ultimately what we want to do is provide more holistic services and move from just providing parts and maybe a service call out here and there. And so I think all of that stuff is starting to come together now. We've rolled out commercial intensity worldwide. So we're completed now through the Americas, our Europe, Africa and the Middle East business and then also in Asia Pacific. We're seeing really good results where we first started the program in North America. And now we're just starting to see the benefits in Asia Pacific and in Europe. So as we continue to evolve that program and continue to get more mature, I'm confident that we can sustain this type of levels and continue to grow our aftermarket business. And then ultimately as we move through reliability-based systems and add more technology here, we really start to partner with operators, their maintenance departments, their reliability departments and providing a much more holistic service overall in our aftermarket offering.

And then could you just from a more color into what happened with FCD bookings? Did the bookings relatively flash in the quarter, was that all related to general industrial being weakened. We know you mentioned oil price impacting the general industrial business, you mentioned that you expect to see a better North American option in channel given higher oil prices, have you already seen improvement in that end market yet? Have your customers really stopped destocking at this point?

Yes. So that was the challenge for FCD and it was - as you know, right, General Industries contains the distribution booking. And so really that was the only negative spot in our FCD bookings was the North American distribution channel. And so as commodity prices went down in the fourth quarter, distributors stopped stocking in putting more product on their shelf. And I think that that's very natural, it happens all the time and we've got good visibility to their inventory levels. And so we had a little bit of awarding and knew it was coming. Now what I expect is with oil prices back in a much better place than where we were at the beginning of the year, we should start to see completions in production in North America progress probably sometime late this quarter or in the back half of 2019. And as that activity increases will see distributors start to spend money and stocking product on their shelves, and where we get the biggest benefit is in that FCD side. And so I feel reasonably good with the FCD bookings overall, but I would say that's probably the biggest risk is when this North American activity start to come back and do - start to put product back on their shelf.

Our next question comes from Jeff Hammond from KeyBanc. Please go ahead. Jeff, your line is now open. Can you check to see if you've muted. Okay. We'll go on to the next one. And our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

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

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

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

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

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

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

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

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

Yes, Joe, we understand and we've done all the math and we've had a lot of discussion on this. But I just, for us and where we made the decision, is we're still very early in the year. And so we're pleased with what happened in the first quarter and we are focused on meeting our commitments for the rest of the year. But there's still a lot to do, I mean, we've got executed on our transformation, we've got to continue to hold the margins. I mean a lot of things still have to go right for the next three quarters. And then the other thing, I just want to remind you and others that in December we talked about - at the Investor Day, we talked about the different phases. In the first phase, we were in, which is all of last year was a stabilized phase. And now we are very much in the transformation phase, but the stabilized phase, wasn't that long ago. And so, we're still concerned about potentially some surprises here and there, but we feel very good that the teams are making great progress, and we very much want to move into our optimized state. And so you're right now, we're very committed to what we said in our full-year guidance. And then again, the full-year guidance is 17% EPS growth year-over-year. And so it's not a small task, and what I'd say is, when we put guidance out, we want to make sure that we can absolutely meet that commitment, and that's what we're trying to instill internally here at Flowserve, and so that's what we're going to do externally. But we'll continue to reassessment throughout the year, and as things move and change and - but right now, we're sticking with the full-year guidance we put out last call.

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

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

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

Yes. No, we actually feel really good about our oil and gas outlook. And as I said earlier, and as you know, right, we're more of a downstream focused company, and so we're highly focused to the refinery side, and we feel good about the outlook for the next couple of quarters in the refinery segment. A lot of that's driven by regulation changes and move to cleaner fuels. And so that's moving very well. As we talked about in the Investor Day in December, we launched the strike zone initiative to get back into the midstream space. And so this is midstream pipeline, primarily focused on the Americas, but obviously this pipeline work all over the world. We're seeing incredible progress with the pipeline work. And so we know we're taking market share, because this is an area that we didn't have any bookings in 2017, and early parts of '18. And so there's still a lot of build out in North America on pipeline and our outlook for the pipeline in the midstream is incredibly robust into Q2, Q3 and Q4. And then the other big piece here is LNG. And so we got a handful of LNG orders early in the first quarter, and we're actually very pleased with what we were able to bring in. But it's just the beginning of this LNG wave. And so there is a significant amount of LNG projects going forward. And for us, we've got a great valve portfolio that supports the LNG projects. In addition to that, we've got pumps that fit into that space as well. And so we talked about our power as a pure play initiative, we're bringing our pumps, valves and seals together. The LNG market is one that we're absolutely focused to bring the whole portfolio of Flowserve together to capitalize on that. And so I think you'll see more LNG discussion from us as we go throughout the year into 2020.

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

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

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

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

Yes. So we talked about this in Investor Day and the genesis is that the reason that we put them together was really focused on our customers and better supporting our customers. And I think we're making tremendous progress on that, and so there are no silos, there's no barriers within the pumps platform now. We are better positioned to manage the commercial operations, project management, and now we're moving into kind of the manufacturing planning, the supply-chain side, the product rationalization opportunities, and all of those things will start to drive cost - product cost down and improve our productivity within the manufacturing. So I think there's more good things to come here in terms of driving cost out. We haven't really started that today, and really the focus is been about really getting positive customer response and doing the right things for our customers. And then what I'd say is in the first quarter, we received incredibly positive feedback from a lot of our customers that we've got better communication, clear accountability, and then ultimately better performances is helping there as well. But I do think we will continue - we will get some cost and cost savings as we continue to integrate these two platforms and drive those activities forward.

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

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

So thanks, Brett. So I'm happy to say is that actually nothing came in as a surprise. I think for the first time we kind of actually nailed our cash forecast. So I think everything to Scott's point earlier, I think we are executing where we expected to be between the sales through net, margin and also the working capital. So I would say, nothing really surprised us. I think it came in pretty close - what surprised us is that we came so close, And so that's a good thing. As far as the contract assets, I think it just shows a change in behavior versus last year versus this year. Last year, the processes were in place. So contract assets are effectively WIP. And material is brought in, now with a disciplined, this year as it was last year. So last year I think even in the call last year we we're really disappointed. We didn't think we had a good handle on what was going on with the inventory, and we learned from that and through the balance of the year we're much more disciplined. Scott added to the organization. He put metrics in place. We are doing weekly tracking and as we went into this year and we kind of the ended the call - on our last call that we were expecting to have much better control around the first quarter, around amount a material we're bringing in and getting the jobs out and that played out. The team did an outstanding job getting the contracts out and putting the discipline in place to make sure material wasn't coming in.

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

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

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