Dover Corp (DOV) — Q1 2015 Earnings Call Transcript

Thank you. Good morning. And welcome to Dover’s first quarter earnings call. With me today are Bob Livingston and Brad Cerepak. Today’s call will begin with some comments from Bob and Brad on Dover’s first quarter operating and financial performance, and follow with an update of our 2015 outlook. We will then open the call up for some questions. As a courtesy, we kindly ask that you limit yourself to one question with a follow-up. Please note that our current earnings release, Form 10-Q, investor supplement, and associated presentation can be found on our website, dovercorporation.com. This call will be available for playback through May 5th and the audio portion of this call will be archived on our website for three months. The replay telephone number is (800) 585-8367, and when accessing the playback, you’ll need to supply the following access code, 19194889. Before we get started, I’d like to remind everyone that our comments today, which are intended to supplement your understanding of Dover, may contain certain forward-looking statements that are inherently subject to uncertainties. We caution everyone to be guided in their analysis of Dover by referring to our Forms 10-K and 10-Q for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statements. Also, we undertake no obligation to publicly update or revise any forward-looking statements except as required by law. We also would direct your attention to our website, where considerably more information can be found on Dover. And with that, I’d like to turn the call over to Bob.

Thanks, Paul. Good morning, everyone. And thank you for joining us for this morning’s conference call. Our businesses continue to perform well against the backdrop of significant headwinds in our energy-related markets, as well as the increasing foreign exchange impact of the strengthening U.S. dollar and slower than expected activity in our core retail refrigeration markets. These headwinds caused our first quarter results to be below our expectations. We continued to take aggressive restructuring actions to better align our costs to anticipated demand, just as we did in the fourth quarter. From a geographic perspective, our non-energy related U.S. markets moderated, while Europe and Asia were solid. Excluding U.S. energy markets, all regions grew in the quarter. Now let me share some specific comments on the quarter. In energy, our drilling and production businesses were significantly impacted by a sharper than anticipated decline in the North American oil and gas markets, resulting in customer destocking and lower order activity. In response, we took restructuring actions during the quarter to better align our cost base and we will continue to pursue appropriate cost reductions going forward. In engineered systems, we achieved solid organic growth across both platforms. Within printing and identification, our businesses performed very well globally. The industrial platform achieved broad based organic growth led by continued solid results in our waste handling and auto-related businesses. Our fluids segment once again performed well, and we are experiencing strong market conditions for fluid transfer products, which were the primary driver. The majority of our pump markets remained solid, though year-over-year comparisons were impacted by strong project shipments in the first quarter of last year. The refrigeration and food equipment market has remained stable. We expected a slow start to the year based on reduced activity from a key retail refrigeration customer, and volume from other customers has been slower to develop than anticipated. We expect overall customer activity to pick up in the back half of the year. Additionally, our glass door business has remained strong. Our acquisition pipeline rebuilt nicely in the first quarter and is now quite robust. And I am optimistic that we will close on several acquisitions in the back half of the year. In addition, we completed the sale of a business in the first quarter for $185 million and also announced the agreement to sell another for $500 million. We will use the deal proceeds to complete our previously announced $600 million of share repurchases in 2015. Now let me address our revised outlook for the year, which is largely unchanged for engineered systems and fluids except for foreign exchange. Their markets have remained healthy, and we expect them to have solid growth in 2015. As you would expect, North American energy fundamentals are having the biggest impact on our forecast. As a result, we expect significantly lower revenue in our drilling and production businesses. Several of our other businesses in our energy segment are less exposed to upstream oil and gas activity, and thus have been less impacted than our drilling and production businesses. Overall, we expect the second quarter to be the lowest revenue quarter of the year for energy. In engineered systems, we anticipate continued growth in our industrial platform and strong results in printing and identification driven by new product introductions and positive market dynamics, largely offset by increased foreign exchange headwinds. Regarding fluids, we believe the solid global markets will continue for fluid transfer and most of our pump businesses. Our expectations are supported by ongoing safety and environmental regulations, a positive retail and fueling environment, and new pump product introductions, partially offset by the impact of foreign exchange. And lastly, within refrigeration and food equipment, we now expect a tougher year driven by lower order activity for our cases and systems. We do expect our glass door, heat exchanger, and commercial food equipment businesses to perform well and help mitigate the previously mentioned softness. With that, let me turn it over to Brad.

Thanks, Bob. Good morning, everyone. Let’s start on slide three of our presentation deck. Today, we reported first quarter revenue of $1.7 billion, a decrease of 5%. This result was comprised of an organic revenue decline of 6%, growth from acquisitions of 5%, and a foreign exchange headwind of 4%. EPS was $0.72, including $0.10 of restructuring. Segment margin for the quarter was 13.5%, 340 basis points below last year. Adjusting for restructuring and normal acquisition purchase accounting cost, our overall margin was 15.5%. Bookings decreased 11% over the prior year to $1.7 billion, reflecting weak energy macros, softer orders rates in refrigeration, and foreign exchange impacts. Overall book-to-bill finished at 1.02. Our backlog decreased 13% to $1.2 billion. Free cash flow was strong at $103 million for the quarter or 6% of revenue. For the full year, we expect to generate free cash flow of approximately 11% of revenue. Now let’s turn to slide four. Engineered systems grew organic revenue 6% with broad-based growth in both platforms. Fluids grew 2%, benefiting from solid fluid transfer markets, partially offset by tough comparisons connected to a larger order shipped last year. Refrigeration and food equipment’s organic revenue declined 7% on tough comparisons in retail refrigeration and can shaping equipment. As discussed on previous calls, the can shaping business can be lumpy quarter-to-quarter, but the market remains solid overall. Weak macros in energy drove organic revenue down 24%. Acquisition growth in the quarter was 5%, comprised of 15% in energy, 2% in fluids, and 1% in engineered systems. Foreign exchange impacted the total company by 4%, as seen on the chart. Turning to slide five in our sequential results. Revenue decreased 13% from the fourth quarter primarily reflecting weak drilling and production markets, softer retail refrigeration activity, the impact of foreign exchange, and the timing of pump shipments. Overall, energy decreased 22%, refrigeration and food equipment decreased 19% coming off a strong fourth quarter, fluids was down 10%, and engineered systems declined 3%. Sequential bookings decreased 7%. Of note, energy declined 22% on weak market fundamentals. Engineered systems was down 8%, principally driven by tough comparisons in waste handling. Refrigeration and food equipment seasonally increased 14%, although less than anticipated. Now moving on to slide six. Energy revenue of $430 million decreased 10% and earnings of $52 million decreased 56% from last year. Excluding the combined $29 million impact of Q1 restructuring and purchase accounting costs, earnings decreased 32%. Energy’s results were significantly impacted by a steeper and broader deterioration of the North American oil and gas markets than previously forecasted. The result was reduced exploration and production CapEx spending and significant customer destocking, most notably in our North American drilling and production markets. Solid activity in compression winches, ESPs, and international markets helped to partially offset challenges in our business. We took additional restructuring actions in the first quarter to better align our cost. Over the last two quarters, we have incurred approximately $25 million in charges in our energy segment. These actions will provide $45 million in benefits this year. In addition, we have taken other cost reduction actions, which should provide an incremental $30 million in savings. Excluding the Q1 restructuring and purchase accounting cost, our adjusted operating margin was 18.8%, reflecting lower volume and modest price declines, offset by the benefits of productivity and prior period restructuring. Bookings were $417 million, a decrease of 13% from the prior year. Book-to-bill was 0.97. Turning to slide seven. Engineered systems had another solid quarter, where total revenue of $573 million was up 1% overall, earnings of $88 million increased 6%. Our printing and identification platform revenue of $230 million decreased 1% overall. Of note, organic revenue grew 8%, but was offset by significant foreign exchange headwinds. These results were driven by continued strong digital printing activity and solid global markets in our core printing and coding business. In the industrial platform, revenue grew 2% to $343 million, including organic growth of 4% offset by foreign exchange headwinds. Revenue growth continued to be particularly strong in our waste handling business. Margin was up 70 basis points to 15.4% on volume leverage and productivity. A one-time insurance recovery of $4 million largely offset incremental restructuring charges in the quarter. Bookings were $573 million, a decrease of 8%, reflecting an organic bookings decline of 3% and a 6% impact from foreign exchange. Our printing and identification bookings decreased 6% to $236 million. However, adjusting for foreign exchange, organic bookings were up 3%. Industrial bookings decreased 9% to $337 million, largely reflecting impact of order timing and softer markets in a hydraulic cylinder business. Book-to-bill for printing and identification was 1.02, while industrials was 0.98. Overall, book-to-bill was 1. Now moving to slide eight. Within fluids, revenue decreased 1% to $340 million and earnings of $55 million declined 6%. Revenue performance was driven by organic growth of 2% and acquisition growth of 2%, offset by foreign exchange headwinds. Our fluid transfer businesses continue to benefit from strong demand in global retail fueling markets and ongoing safety and environmental regulations. Pumps results were primarily impacted by the timing of large shipments to customers in the plastic and polymers markets. Segment margin was 16.1%, a decrease of 70 basis points, largely reflecting product mix. Bookings were $339 million, a decrease of 7%, primarily reflecting the timing of project-related orders within pumps, partially offset by solid fluid transfer markets. Book-to-bill was 1. Now let’s turn to slide nine. Refrigeration and food equipment’s revenue of $372 million declined 10% from the prior year. Earnings decreased 19% to $36 million. Revenue performance in the quarter was essentially as expected. Our results were largely driven by reduced order activity for refrigeration systems and cases by a key retail customer, which offset solid heat exchanger and commercial food equipment activity. Operating margin was 9.7%, a 120 basis point decrease from last year. This result largely reflects reduced volume and product mix. Bookings were $420 million, a decrease of 15%, principally reflecting slower and anticipated order activity from our core refrigeration customers. Book-to-bill was 1.13. Going to the overview slide number 10. First quarter net interest expense was $32 million, in line with our forecast. Corporate expense was $35 million, up $4 million from last year and consistent with expectations. Our first quarter tax rate was approximately 29%, essentially in line with our revised full year forecast. Capital expenditures were $28 million in the quarter. Lastly in the quarter, we repurchased 2.8 million shares for $200 million. As previously communicated, we will repurchase a total of $600 million in shares this year. Now onto slide 11, which is an update on energy. We now expect full year revenue for energy to decline 16% to 18%, a reduction of about 10 points from our prior forecast or about $200 million in revenue with organic revenue declining 24% to 26%. The biggest changes in our drilling and production in automation markets and although less exposed, our bearings and compression forecast has also been revised to reflect general energy market conditions. Moving onto slide 12, which shows our full year guidance. We now expect full year revenue to be down 4% to 6%. Our expected organic revenue will decrease 2% to 4%. Completed acquisitions will add approximately 2%. We now expect the total impact of foreign exchange to be approximately a 4% headwind. Segment margin is estimated to be between 16.8% and 17.3%, excluding restructuring costs. Corporate expense remains at approximately $125 million and interest expense should be around $127 million. We now expect full year normalized tax rate to be approximately 29%. CapEx should be about 2.3% of revenue and our full year free cash flow will be approximately 11% of revenue. From a segment perspective, energy’s full year organic revenue forecast has been reduced to a negative 24% to 26%. Refrigeration and food equipment’s organic revenue forecast is now expected to be negative 1% to 3%. Energy systems, engineered systems and fluid organic forecasts are essentially unchanged. Turning to slide 13. In 2015, we now expect the year-over-year impact of restructuring costs to be a $0.01 impact to a $0.02 benefit. Performance largely driven by volume but also including items such as price, productivity and restructuring benefits will reduce earnings $0.47 to $0.58. Within this estimate, our restructuring benefits of $0.31 to $0.33. The benefit of acquisitions already completed will be core to success. Shares will provide $0.23 to $0.24 based on an estimate of $600 million in repurchases in 2015 and the carryover impact of our 2014 repurchases. Interest, corporate, and the tax rate will be in the range of a $0.02 impact to a $0.01 benefit. In total, we now expect EPS to be $4.20 to $4.40, inclusive of $0.15 to $0.18 of restructuring costs. Incremental $0.05 to $0.08 of restructuring costs will mostly impact the second quarter. Regarding the second quarter, we expect revenue to be up 7% to 9% sequentially, largely driven by a seasonal increase in refrigeration and food equipment and a sequential decline in energy. With that, I will turn the call back over to Bob for some final comments.

Thanks, Brad. Overall, I’m pleased with the way our company’s performed in the first quarter in the face of tough markets. We continue to focus on lean and productivity initiatives across the organization. Through all of our actions, we have better positioned ourselves for both our current demand environment and for margin enhancement over the longer term. With our strong free cash flow and the strength of our balance sheet, we have significant capacity to strengthen and build our position within our growth spaces. We remain focused on growth investment, as well as investment in productivity initiatives, including supply chain optimization and shared infrastructure. As I look beyond the current environment in energy, I’m excited about Dover’s position. We have structurally improved our cost base while at the same time, continued to invest in product development and innovation. These internal initiatives combined with value-creating acquisitions give me confidence that we will not only leverage volume improvements but also deliver very strong performance. With that, I’d like to thank our entire Dover team for their continued focus on serving our customers and driving results. And Paul, let’s take some questions.

Thanks, Bob. At this point, I would like to remind all our listeners to limit yourself to one question with a follow-up, so we can get more people in the queue. And with that, Angie, if we can have our first question.

Thanks. Good morning and thanks for the detail around the energy markets.

Good morning to you, Nigel.

Good morning. So, Brad, you provided some color on 2Q sales, which is helpful, but any interest to call out in terms of the margin and particularly with regard to energy and also the impact of restructuring payback primarily?

Okay. You were asking about Q2 margins. We’re not going to delve into that. However, for the year regarding energy, we anticipate that margins will continue to improve as the benefits of restructuring take effect. As mentioned, Q2 will be influenced by additional energy restructuring costs. By the end of the year, we expect our decrementals in energy to show significant improvement. In the first quarter, the decrementals were around 39%. I anticipate the decrementals in the second quarter will be slightly higher, about 41% for energy. For the year, we expect decrementals in our energy business to be slightly below 40%. Initially, we thought it would be between 30% and 35%, but the steepness of the curve and the downturn have been considerable. As a result, achieving cost reductions and maintaining lower decrementals is currently a challenge.

Right, right. Exactly. So I’ll leave energy that I had. I’m sure other people will come back to that. In terms of refrigeration, obviously a lot of your competitors have been calling out trends well. So I’m just wondering, I understand some of the commentary around the customers, but it seems like a general market pause here. So I’m just wondering what is your perspective on what’s causing this pause? What gives you confidence it’s going to come back, and can you maybe just talk about market share as well? Do you feel you hold market share here?

Hi Nigel, this is Bob. I’ll address your question and also add to your earlier inquiry regarding energy margins. We are focused on achieving nearly a 20% operating margin by the end of the year, specifically in the fourth quarter. Both Brad and I, along with the business team leaders, are confident that we can reach this goal with energy. Regarding refrigeration, I’ve been cautious in discussing this over the past year, but I need to revisit the situation from around last April-May. We were informed by Wal-Mart, a significant customer for Dover, Hill PHOENIX, and Anthony, that we wouldn’t participate in their next bid cycle for large format stores. This is impacting our revenue and order activity for the first quarter and the full year of 2015. While Wal-Mart was responsible for about $300 million in business last year, this change is expected to reduce our 2015 revenue by around $100 million. We were aware of this since last spring, but we weren’t certain about the transition timing. We have been actively working to capture more market share from other national and regional accounts and have made good progress. However, the refrigeration segment will see a $100 million reduction due to Wal-Mart, though we’ve secured about $60 million to $70 million in new business so far this year, which hasn't yet reflected in our order rates.

Well, thanks Bob. That’s great color. I’ll leave it there. Thanks.

Good morning, guys.

Good morning, Andrew.

Good morning, Andrew.

Just a question on pumps. Just want to understand what these delays have to do. I guess, you mentioned chemicals from the guidance that seems that you guys fully expect to get it back, just would like to get more color here?

Okay. First, I wouldn’t use the word delays. A significant part of the tough comparison in the first quarter is that we had notable project shipments during that time. If you look back at our notes from last year, we reported organic growth in the first quarter of about 12% to 14%. We mentioned that this growth was largely driven by project shipments in some of our businesses. We then saw a drop to an organic growth rate of about 1% or 2% in the second quarter of last year. To understand the typical performance for the pumps business, you should consider both quarters together. This year, we're seeing a similar pattern, but it’s reversed. The first quarter has lower organic growth rates due to the tough comparison from last year, while we anticipate a much higher organic growth rate from the fluids and pumps businesses in the second quarter of this year.

Got you. So when you say…

It’s simply is just a timing of project shipments. I’m sorry. Yeah.

Got you. That makes perfect sense. The other question I had, a lot of companies are sort of talking about this CapEx delays, sort of global CapEx delays this quarter. Yet if I look at your printing and ID business, it seems to be doing quite well. Can you just talk a little bit more about this dichotomy between CapEx and maybe something more consumer-driven spending that you were seeing?

I believe you've highlighted the key distinction. I wouldn’t categorize most of our printing and identification business as capital expenditure. While a portion of it, particularly within our digital print segment, does qualify, the majority, especially from Markem-Imaje, wouldn’t typically be considered CapEx. Instead, it functions more as operational spending with our customers. We experienced robust organic growth of 8% in that platform this quarter, spread across all three businesses. Specifically, Markem-Imaje, our largest business within that platform, achieved 6% organic growth for the quarter. It was a strong quarter, and we anticipate continued success throughout the year. We see this as a very solid business for us this year.

Thank you very much.

Thanks and good morning.

Good morning.

Just on energy, what rig count assumptions are baked into your revised guidance now?

Lower than they are today.

Okay.

We mentioned earlier in the call that the latest information I have, based on Steve's quote, indicates that the U.S. rig count was at 9.50 or 9.54 as of last week. This decline has been sharper and more significant over the past four months than we expected three to four months ago. I’m uncertain where it will stabilize; I don't think anyone knows. However, we are quite confident in our energy forecasts and expect the rig count to decrease further. I want to emphasize that if the rig count falls below 900, we have additional measures we will need to implement beyond what we have planned for the second quarter, and we will proceed with those actions.

Okay.

We feel confident with the plan we have in place and the actions we've taken over the past two quarters. Given the actions we're implementing in the second quarter, we believe our businesses are appropriately sized to handle the 900 level, or possibly a bit lower if it drops significantly. We have additional measures ready if necessary.

Okay. And then on pricing, we’re hearing from a number of your peers about pricing pressures from both currency as well as of course in energy that are on the way. And how are you guys thinking about it and seeing and dealing with that?

I have to admit I missed the first part of that question. Could you repeat it?

I’m asking about pricing pressure that we’re hearing from….

Yes.

...that we’re hearing from your peers...

Yes.

Can you share your thoughts on whether you are noticing any developments in pricing pressure driven by currency and energy, and how you are managing those factors?

Yes, we are experiencing price pressure and we continue to anticipate it. The entire supply chain, particularly in North America’s oil and gas market, has faced significant price pressure over the past three to four months from crucial customers. We encounter this issue on an account-specific or even field-by-field basis, with discussions varying widely by product line. In the first quarter of this year, we had more engaging discussions, particularly regarding our PDC inserts and sucker rod products, compared to some of our other offerings. We still have price concessions that need to be negotiated for our forecasts this year. However, the experience we gained in the first quarter gives us confidence that we can handle these issues and still aim for an operating margin of around 20% for our energy business by year-end. To give you perspective, in the first quarter, we saw about a 2% price impact for the segment. For the entire year, we are prepared to address a 3% to 5% price concession, which is included in our forecast.

Great. Very helpful. Thank you.

Good morning, guys.

Good morning, Shannon.

Hey, Bob, you said the second quarter would be the lowest revenue quarter for energy, is that sort of the end of destocking or seasonality or any other reason you feel like at the bottom?

Yeah. I am going to label it as the destocking impact more than the seasonality of the business, Shannon. I would say that for both our PDC inserts, as well as our sucker rod business that the destocking we believe we'll see the bulk of the destocking activity occur between February and May. In fact, some of our customers are signaling now pretty strongly that the second quarter will see the end of their stocking activity.

Okay. Great. And then it sounds like we are seeing the bulk of the destocking activity occurring between February and May.

It’s been insignificant. And I’ll give you one example, Shannon. It's probably been most prevalent within our PDC inserts business. In fact, the first quarter our revenue with our PDC inserts business was down 43%. And I think about two-thirds of that was related to reduced activity in the oil and gas markets here in North America. I think the other one-third was destocking. I think we'll see that continue during the second quarter. But I think by the time we get through the second quarter that we will see the disappearance of the destocking activity in the second half of the year.

Okay. Great. That's helpful. And then, in terms of capital deployments, you sound pretty optimistic about some deals in the second half of the year. Any color there on sort of magnitude or focus areas of what you are looking at?

I mentioned that my comment was regarding the second half of the year, not the second quarter. Clearly, nothing is close to finalization at this point, so I will hold off on any specific comments about color and size until the call in July. We have a fairly active pipeline in three of our four segments; the one we are not focusing on is energy. However, we are interested in expanding a couple of product areas, especially in automation. I would note that there has been a lack of appealing properties and businesses coming to market during the first four or five months of the year.

Okay. Great. Thanks a lot, guys.

Hey, guys. Thanks for taking the call.

Good morning.

Can you explain the size of the restructuring for energy? How has this strategy evolved? Could you discuss what your initial focus will be in the fourth quarter and how you plan to expand throughout the year, particularly regarding the closing of service facilities? As the downturn progresses, what areas will you prioritize?

Okay. So you want me to go back to the fourth quarter.

Well, just talk through the, what’s the initial response than incrementally what can you add on to take cost out of the business?

From the start of the fourth quarter to the end of the first quarter, we reduced our headcount in the energy sector by just over 1,000 employees, which is approximately 15.5% of our employee base as of the beginning of the fourth quarter. Most of these reductions were due to a decrease in output capacity that we anticipated, so it was primarily a variable activity. Additionally, we are seeing a significantly higher load on SG&A in the first quarter. I want to emphasize that we have not yet made any cuts to product development and R&D. We have all been motivated to scale back ongoing product development and innovation efforts within these key businesses. As I mentioned before, if the rig count drops significantly below the 900 level, we will begin to consider other cost-cutting measures that we have been hesitant to pursue up until now.

Okay. Great. That was perfect. On the fluid transfer size, I think sales growth adds, still looking very strong. Is there any risk to OPW from the four O'Neil pricing, some of that railcar business, is there any change in customer behavior within the fluid transfer fees?

Yes, we have adjusted our expectations for the second half of the year regarding both over-the-road and rail cargo activities related to rail transport. This is not a significant part of our business. For the entire fluids segment, about 10% of the revenue is linked to oil and gas upstream CapEx activity, with that split evenly between North America and international markets. We noticed a slight decline in our pumps business during the first quarter, but we believe we have accounted for this decline in our projections for the rest of the year. Despite this, we anticipate strong growth opportunities in other markets and verticals. Overall, we are confident in our organic growth rate for the entire segment this year, and we feel good about the performance of this segment.

Thanks. Great. Thank you, Bob.

Hi. Thank you.

Hi, Julian.

Hi. You called out mix as a margin headwind in all the segments except engineered systems. I guess within fluids and refrigeration and food equipment in particular, how quickly do you think that mix headwind on margins can reverse?

Let’s address this specifically regarding fluids. Brad might have a clearer perspective on this than I do. The margins were slightly impacted due to the mix, but it’s not a dramatic change, perhaps around 20 or 30 basis points. It’s relatively modest and will gradually work its way through the product line. There’s nothing unusual or concerning in the first quarter activity.

I think it’s sort of a tough comp.

Yeah. It has a lot more to do with the tough comps from the first quarter of last year. But let me give you a commercial or an advertisement here for our performance in fluids. Margins in the first quarter, I think were 16 in a fraction. Operating margins, we do have in our objective for the year, operating margin for the fluids segment to be 20%. And we know that’s a tough reach for the business teams. But we believe we will be very, very close to the 20% operating margins for the year. And you are going to see some rather marked improvement in margins from the segment, especially in the second and third quarters.

Great. And then just circling back to capital allocation, just the size of what you think you can spend. I mean is it fair to say that you are looking to deploy this year the free cash flow after dividends and the sort of $100 million or so extra from divestment proceeds? So that’s maybe $600 million plus you could use on deals in the second half?

Okay. Look, let me just tweak that statement. You should look at the share repurchase activity for this year. And my goodness, we’ve said these six times over the last two quarters that the number will be $600 million. It’s primarily being funded by divestiture of the two businesses that we have announced here in the first quarter, one that’s closed in the first quarter and the second one that will close here sometime in the next few weeks. So that’s really funding the share repurchase activity. So after CapEx and after dividends, we still have a fairly healthy cash flow that’s available for M&A allocation for the balance of the year. And Brad and I will go in a room and arm wrestle as to how much more he allows me to spend if the opportunities present themselves.

Great. Thank you.

Thanks. Good morning, everyone.

Good morning, Nathan.

Who usually wins the arm wrestle?

Bob does.

You have to understand. I’m right-handed and Brad is left-handed. We do arm wrestle with the right hand.

Just following on to your answer to Julian’s question that with the 20% targeted margins for fluids from the year, 16 and a fraction in the first quarter, there looks to be some seasonality in the margins in 2Q and 3Q. But that’s a pretty healthy target. Can you maybe give us some more color on how you get to 20% for the full year?

There is some seasonality in the fluids business, with the second and third quarters typically being the highest revenue periods for the segment, and that trend will continue this year. Part of the growth will come from increased volume leverage, and we expect higher revenue levels in those quarters. I want to acknowledge the business team and our segment leadership for their strong focus on productivity and cost reductions as we grow the business. We are making significant progress in this area. There is no easy solution; it involves consistent effort and effective execution on productivity.

So you would say then it’s primarily cost out and productivity improvements, and that is things that are in your control?

Yes. The volume, the organic growth rate for the segment for the year is 5% to 7%. That type of volume on top of our productivity initiatives is a pretty powerful combination.

What’s your level of confidence that actually making that? I know you said it was a bit of stretch goal at actually making that 20% for the full year.

I feel fairly confident sitting here today.

While we still have a few minutes left, let me take this opportunity to stress that we are focusing tremendously on our operational efficiency and continually optimizing our output. The commitment to our growth strategies remains strong throughout our various business segments, and we appreciate your support. Thank you.

Thanks, Angie. This concludes our conference call for the first quarter. And with that, as always, we want to thank you for your continued interest in Dover. And we look forward to speaking to you again next quarter. Have a good afternoon. Thanks. Bye.