Dover Corp (DOV) — Q3 2017 Earnings Call Transcript

Thank you, Paula. Good morning. And welcome to Dover’s third 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 third quarter operating and financial performance, and follow with our outlook for the remainder of 2017. We will then open up the call for 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, investor supplement and associated presentation can be found on our website, dovercorporation.com. This call will be available for playback through November 2nd and the audio portion of this call will be archived on our website for three months. The replay telephone number is 800-585-8367. When accessing the playback, you’ll need to supply the following access code, 95679213. 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 for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statement. Also, we undertake no obligation to publicly update or revise any forward-looking statements except as required by law. We would also direct your attention to our website where considerably more information can be found. 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 third quarter performance reflected continued strong global markets resulting in organic growth at each segment. In particular, we had strong organic growth across several platforms, including digital printing, waste handling, bearings and compression, and pumps. We also had solid performances in a number of other platforms including marking and coding, retail fueling and retail refrigeration. In all, Dover’s organic growth was 9% in the quarter. In total, our revenue and margin expansion were largely in line with our expectations. In addition, our strong bookings growth sets us up for a solid finish to this year. I am pleased that we are firmly on track to deliver on the three-year plan we outlined in June; we expect solid organic growth and margin improvement this year, and we are positioned to deliver further growth and margin expansion in 2018. I’m also encouraged by our portfolio work to drive long-term success and value creation. We have continued to simplify our portfolio and invest in market-leading platforms that have strong market positions and margin profiles. In addition to the planned wellsite separation, we recently signed an agreement to sell the consumer and industrial winch business of Warn for $250 million and expect this transaction to close in the fourth quarter. Regarding wellsite, we are continuing the process of evaluating our options for separation, the process is moving along well and we expect to announce our plans by year end. Within wellsite, markets have remained quite constructive, and we are on track to hit our 2017 forecast of $1 billion in revenue and $250 million in EBITDA. We are committed to pursuing the transaction that is best for the business and also creates the greatest value for our shareholders. While our portfolio simplification activities advance, we have continued to build the pipeline with targets that enhance and expand our growth platforms. I am very pleased with our execution on the top line this year and I’m encouraged that we’ve made progress on margins. As we enter the fourth quarter and continue working on the wellsite separation, we are actively reviewing our cost structure to right-size our company and improve margins. This review was broad-based, excluding wellsite, with the goal of achieving $40 million of cost savings for 2018. The goal of all of these actions is a focused and consistent portfolio with a sustainable runway for revenue growth and margin improvement. With that, I’d like to turn it over to Brad.

Thanks, Bob. Good morning, everyone. As Bob mentioned, we had a very solid third quarter. We achieved organic revenue growth in all segments and had organic bookings growth in three of our segments. Leverage on this organic growth combined with the benefits of integration led to solid year-over-year margin improvement. Overall, adjusted margin was 15.3%. There were several highlights in the quarter, including broad-based revenue and bookings growth in Engineered Systems, strong revenue and bookings growth in Fluids, along with continued sequential margin improvement; continued organic growth and year-over-year margin improvement in Refrigeration & Food Equipment; and lastly, strong broad-based revenue and bookings growth in Energy. Also from a geographic perspective, U.S., Europe and China markets all grew organically year-over-year. Our full-year EPS guidance remains unchanged. Importantly, this guidance does not include anticipated gain on the sale of Warn, fourth quarter costs associated with the wellsite separation or any incremental rightsizing costs. We record these items as the disposition is completed and as cost of the separation and rightsizing are incurred. Now let’s go through some details on the quarter, starting on slide three of the presentation deck. Today we reported third quarter revenue of $2 billion, an increase of 17%. Organic growth of 9% was complemented by acquisition growth of 10%. Partially offsetting these results was a 3% impact from prior dispositions. Adjusted EPS increased 40% to $1.16. This result excludes $0.02 of disposition and wellsite separation related costs in the quarter. Adjusted segment margin was 15.3%, a 120 basis point improvement over last year, primarily driven by incremental margin on increased volume. Bookings increased 14% to $1.9 billion. This result was comprised of 7% organic growth and acquisition growth of 10%, partially offset by a 3% impact of prior dispositions and reflects strong growth in Engineered Systems, Fluids and Energy. Book-to-bill finished at 0.97. Overall, our backlog increased 18% to $1.3 billion. On an organic basis, backlog increased 12%. Free cash flow was $214 million in the quarter, a sequential increase of $64 million. We expect very strong free cash flow generation in the fourth quarter consistent with our normal pattern. Now turning to slide four, organic growth was broad-based. Engineered Systems grew 7% driven by solid activity across both platforms. Fluids organic revenue increased 5%, principally driven by solid retail fueling and strong industrial pump in pharma and hygienic markets. Refrigeration & Food Equipment increased 2% and Energy grew 31% organically. As seen on the chart, acquisition growth was 30% in Fluids and 8% in Engineered Systems. Now turning to slide five. Engineered Systems revenue of $646 million was up 7% organically reflecting broad-based growth. Adjusted earnings increased 5% over the prior year as volume leverage was partially offset by the impact of investments and material cost inflation. Our printing and identification platform revenue increased 4% organically, driven by continued strong growth in digital printing and solid activity in our marking and coding markets. In the industrial platform, revenue increased 18%, including acquisition growth of 14% and 9% organic growth. The organic growth was broad-based with strong performance in waste handling. Margin was slightly below our expectations, reflecting the timing of investments and modest material cost inflation. Bookings increased 10% overall, including organic bookings growth of 3%. Organic growth reflects solid activity across the segment. Book-to-bill for each of the platforms and overall for the segment was 0.98. Now on slide six. Fluids revenue increased 36% to $563 million, reflecting acquisition growth of 30% and 5% organic growth. Organic revenue growth was primarily driven by strong industrial pump and hygienic and pharma markets, as well as solid retail fueling activity. Earnings increased 32%, largely driven by volume growth, including acquisitions and productivity gains. Our retail fueling integration continues to be on track, supporting strong sequential margin improvement. In all, margin was 15.5%, up 220 basis points sequentially. Bookings grew 39%, driven by acquisitions and 10% organic growth. Organic bookings growth was broad-based. Book-to-bill was 1.02. Now on slide seven. Refrigeration & Food Equipments revenue of $439 million included organic growth of 2%. The organic increase was largely driven by solid activity in Refrigeration. Food Equipment results reflect a continued softness in our commercial cooking equipment markets. Earnings increased 2% from the prior year or 7% when excluding the impact from a prior disposition. Margin expanded 70 basis points year-over-year reflecting volume leverage offset in part by business mix. Bookings decreased 11% organically, reflecting a general slowdown in our retail refrigeration markets and the timing of orders in can-shaping machinery. But you know our can-shaping business is expected to have a very strong fourth quarter as we ship against orders booked earlier in the year. Book-to-bill was 0.82. Moving to slide eight. Energy revenue increased 32% to $359 million, reflecting growth in the U.S. rig count and increased well completion activity. Earnings were $52 million and segment margin was 14.5%, both significantly improved over last year. These results were largely driven by year-over-year improvements in the U.S. rig count, increased well completion activity and continued strong results in bearings and compression, which grew 9%. As Bob mentioned, our wellsite business had a strong quarter with 39% revenue growth and we are on track to achieve the full-year forecast. We expect fourth quarter segment revenue to reflect modest sequential growth. Bookings were up 36% year-over-year and 4% sequentially. Book-to-bill finished at 1.04. Going to the overview on slide nine. Our third quarter corporate expense included $2 million of wellsite-related separation costs. Interest expense was in line with expectations. Our third quarter tax rate was 24.6%. This rate reflects increases due to changes in geographic mix of earnings, which were more than offset by discrete tax benefits. The net result of these items was a $0.04 EPS benefit. Moving on to slide 10, which shows our 2017 guidance. We now expect total revenue to increase 14% to 15% versus our prior forecast of 12% to 14%. Within this forecast, organic revenue growth is 6% to 7%. The impact from completed acquisitions is unchanged at approximately 10%. The full-year impact from FX is now expected to be neutral, up 1 point from the last forecast. From a segment perspective, organic growth is largely unchanged from our prior guidance. Our full-year forecast for corporate expense is $133 million and now includes $2 million of wellsite costs incurred in the third quarter, interest expense is unchanged, and we expect the fourth quarter tax rate to be about 28%. Our forecast for CapEx remains unchanged and the full-year free cash flow is expected to be 10% to 11% of revenue. In summary, our full-year EPS guidance of $4.23 to $4.33 is unchanged. As previously mentioned, this guidance does not include the anticipated gain on the Warn disposition, which is estimated at approximately $230 million net of tax and is expected to close in the fourth quarter. It also does not include any fourth-quarter costs related to wellsite separation. And lastly, it does not include any rightsizing costs currently estimated to be about $40 million to $45 million. At the midpoint, our EPS guidance represents an increase of 39% over 2016 on an adjusted basis. Please note that our guidance bridge can be found in the appendix of our presentation deck. With that, let me turn the call back over to Bob.

Thanks, Brad. Throughout the year, all segments have grown nicely and we had gain share in several of the markets we served. Additionally, we have made progress on several of our initiatives to drive margin expansion. For instance, our retail fueling integration is on pace and sequential margin expansion in Fluids has been strong. Retail refrigeration margins have also grown on improved productivity. Looking forward, we have multiple opportunities to outgrow the broader market. Here are just a few. Our unique position in the fast-growing digital textile printing market is providing us a strong growth opportunity. We see the penetration rate of digital technology climbing to 30% over the next 10 years from the 3% to 4% rate of today. Our comprehensive solutions, including equipment, ink and software positions us very well to fully leverage this technology shift. Within retail fueling, we expect the EMV upgrade cycle in the U.S. to accelerate as our customers begin preparing for compliance with payment regulations that go into effect in 2020. Along with that, our growing offering of remote monitoring and software-as-a-service provides ample opportunity for strong growth. In Refrigeration, we expect food retailers to invest in closed-door refrigeration cases, energy-efficient systems, and in specialized display cases, as they look to manage operating costs and differentiate themselves in the market. In these product categories, we have a leading position. Finally, within our industrial pumps business, the worldwide growth of plastic usage and our customers’ desire for improved efficiency plays to the strengths of this platform. We have the leading position in pelletizers and other polymer processing equipment due to our higher output, faster changeovers, and more compact designs. These growth drivers coupled with our margin improvement initiatives provide a very positive framework for the next several years. And in closing, I’d like to thank our entire Dover team for remaining focused on our customers. And with that, Paul, let’s take some questions.

Thanks. Before we take our first question, I just want to remind everybody, if you can limit yourself to one question with a follow-up, we will get more questions in. So, with that, let’s have the first question, Paula.

Thanks. Good morning, guys.

Good morning, Nigel.

I wanted to start by discussing ES margins. You mentioned that your margin aligned with your expectations, but I'm curious about the impact of raw material inflation. Additionally, I noticed that the pricing for ES improved from 0.3% to 0.5% from the second quarter to the third quarter. What actions are you taking on pricing to mitigate the effects of raw material inflation?

The material inflation, Nigel, in the third quarter for Engineered Systems was a little bit higher than we had expected coming into the quarter. You do appropriately note the price increases in both the second and third quarter, and I would love to have seen more of a price increase in the third quarter, and I know the guys are working on that here for the fourth quarter and going into 2018. But at the end of the day, even though I say margins overall came in largely in line with our expectations, margins at Engineered Systems, to be frank, were a bit disappointing and they should be better.

Okay. But it sounds like you’re trying to get pricing pushed through the channel.

Yes.

You mentioned in the press release that the process for wellsite is on track. Given the costs incurred during the quarter, are you considering a dual track approach, preparing for a spin while remaining open to other options, so that if you decide to spin in December, the process could be fairly quick from that point?

We are managing a dual track process. We have a strong workstream internally, along with our external advisors, to prepare for a spin-off. If we reach year-end and decide that our separation process will involve a spin, we expect to complete the spin before the end of the second quarter.

Okay, Bob. That’s great. Thanks. I will leave you there.

Hi, guys. Good morning.

Good morning, Steve.

Good morning, Steve.

Can you discuss the $40 million in expected cost savings for next year? However, there may be some challenges if you decide to spin or sell. You mentioned spending some money in the fourth quarter that isn't included in the guidance. Could you connect those points and clarify what information is new and what is not in the update?

Okay. I’ll let Brad address the bridge. First, I want to respond to your comment about stranded costs. If we assume that the separation plan for wellsite is a spin, the costs associated with wellsite as it currently operates within Dover and the segment costs will transfer almost entirely with the spin. Therefore, I consider the stranded cost to be a negligible amount. Moving into 2018, without wellsite, we anticipate a smaller revenue base. On a pro forma basis, we expect to achieve improved margins in 2018 compared to 2017. As my earlier comments indicated, we are conducting a comprehensive review of all areas of Dover, excluding wellsite, and we believe we can identify around $40 million in savings for 2018. Brad also mentioned the costs required to realize those savings, which are estimated to be between $40 million and $45 million. My concern with this $40 million to $45 million figure is related to timing. We still have a few projects that need approval in the next two to three weeks and internal communications to implement. At this point, I am unsure if we will be able to allocate the entire $40 million to $45 million in costs to the fourth quarter; some of those expenses may extend into the first quarter.

Yeah. Got it.

So…

Yeah.

So, Steve, just to clarify the bridge, because it’s still a work in progress. I think we are confident on the $40 million of benefits. We are not as confident as the split on the cost side, but a lion's share of it will be in the fourth quarter based upon what we know today and it is not in the bridge, so…

And that’s more than what you are already receiving from the base restructuring you are currently implementing.

Absolutely.

Yes.

So the base restructuring we’ve been discussing amounts to $18 million to $20 million. This restructuring is still ongoing, which brings us to over $40 million. It generates benefits for us in the current year of approximately $47 million, with some carryover expected into 2018 as well.

Okay. Just one quick question to follow up on Nigel’s inquiry regarding the Engineered business. Is there anything about the distribution channel and product ID that might be impacting margins? I know your peer reported that margins there were a bit mixed. Is there anything notable in PID from a margin perspective?

No. From a marking and coding perspective, we had a very good third quarter. We are continuing to make some investments within our digital print business for 2017. It's around $5 million or $6 million of incremental investment that will not continue or repeat in 2018. However, regarding marking and coding, it was a solid quarter.

Got it.

To answer your specific question, no issues with distribution.

Okay, I have one more quick question, and I know you might be expecting this, Paul. Bob, with all the changes happening in the portfolio, you've made significant progress at the company and transformed it quite a bit. Is there any further advancement in succession planning to discuss? Clearly, the company has evolved significantly, and you've put in a lot of effort.

The answer is no, other than I would repeat what I’ve said before with other questions on this topic. The Board and I run and have been running a rather robust process around succession planning. I think the Board feels quite comfortable with it. We do not anticipate a near-term change.

Hi. Good morning, guys.

Good morning.

Good morning, Scott.

I was curious about your comment regarding dual tracking the Energy business; is there a possibility of selling parts of Energy while keeping the rest? There are some valuable assets in there.

That’s not.

I won’t rule anything out, but I really don’t see that happening.

Okay. And then on the Refrigeration business when you showed a couple book-to-bill 0.82, I mean, I think, most of us knew that market was getting a little bit softer. But is some of that reflected in the fact you guys have just been cutting your SKUs that kind of redefine your market a little bit? Is there any way to parse that out? No, look, we’ve actually been asking that question ourselves. I don’t think that’s having an impact with our customers or with the business. It’s been a very odd year, Scott, within this segment. We typically have, my goodness, for years have historically seen the second quarter and the third quarter being the high points for this segment with the two shoulder seasons, the first quarter and the fourth quarter being light. We saw the change starting to occur with this segment and the order rates in the fourth quarter of last year, we had very strong organic growth in the first two quarters of this year. And the questions on every call this year so far had been, well, why aren’t you raising your guide on the Refrigeration segment with respect to the top line. And part of our concern is that we knew we were a bit frontloaded in the first half of this year with respect to some customer activity, most notably around some of the cutover on the DOE regulations. We just did not know what we were going to see definitively in the second half. I fully expect 2018 to return this segment to a more seasonal and normal pattern that we’ve seen over the last several years.

Okay. Fair enough. Good luck guys. Thank you. Best of luck.

Yes.

Good morning, guys.

Good morning, Andrew.

Bob, so during the quarter, actually, you mentioned potential for $0.04 of hurricane impact. But it seems like your businesses were able to absorb the impacts pretty well. So could you see, and did you end up seeing less impact than you thought? And if there was any impact, what particular businesses absorbed the most impact?

Well, it sounds like a significant number, but regarding Harvey in Texas, our energy operations in the Houston area actually lost 4,000 work hours due to the storm and the shutdown of factories for five or six workdays. In mid-September, we anticipated challenges in closing the quarter to meet our top-line plan and estimated missed earnings of around $0.03 to $0.04 for the quarter. The teams did an exceptional job in recovery efforts in the latter half of September. However, I should mention that we incurred additional costs for overtime and extra work to serve our customers, likely amounting to $0.01 to $0.02 related to the storm, which is included in our EPS results for the third quarter. To a much lesser extent, when the hurricane affected the East Coast, we had two or three of our larger operations there shut down for one to three days, but the most significant impact was due to Harvey.

Bob, do you see any positive impacts from the hurricane in terms of replacement in any of your businesses, any step up as you’ve gone through October here?

We’re seeing a little bit of an increased activity in the Houston area with respect to glass doors to replace some of the damage doors. They are especially in the smaller footprint stores. And I think it’s possible, though we haven’t booked a specific order yet. But it is possible that we see some order activity here in the fourth quarter as a result of the storm. But if it happens, it’s not in our guide and we haven’t seen the orders yet.

And can you give us a little more color on your fueling and transfer market? You mentioned last quarter that it was actually a rail business that was a big lead on the business this year. Was that still the case in Q3, and do you see any stabilization there? And do you think a moderation in EMV-related activity that you expected this quarter?

A lot of questions.

Let me be specific about transportation within our Fluids segment. That part of the business generates around $100 million in revenue.

Yeah.

I think it was down almost 20% year-over-year in the third quarter. Our retail fueling business…

Stable at that level. But it’s stable.

In our retail fueling business, we experienced organic growth of 3% to 4% in the third quarter. Activity related to dispensers, hanging hardware, and underground components remains strong in Europe and China. However, dispenser activity in the U.S. declined as anticipated during the third quarter. I would like to note that in the last two weeks of September and continuing into October, the incoming order rates for dispensers have significantly increased. If this trend continues or expands through the fourth quarter, we have the potential to exceed revenue expectations for that period.

Thanks. I appreciate it.

EMV was subdued in the third quarter as we anticipated and discussed in May and at our June conference. In recent weeks, we have engaged with three of our top customer brands regarding their EMV rollout for 2018, and I believe we will have a clearer understanding of EMV activity for 2018 in the next two to three months.

Appreciated Bob.

Hi. Good morning, Bob.

Good morning, Andrew.

Good morning.

Good morning, guys. Just a question on Engineered Systems, so it does seem that margins have disappointed in the quarter. Often when we have these situations, it took several quarters for the ship sort of to right itself. How fast do you think Engineered Systems can get to sort of normalize operating leverage?

I think you will see an improvement in their margins here over the next two quarters.

Terrific. And is it more operational or is it more pricing?

I would say there will always be operational opportunities. However, the disappointment for the third quarter was related to material inflation and pricing offsets.

Got you. And just a follow-up on free cash flow, your previous outlook was 140% conversion. You are now saying 130%, if we look at, sorry, cash flow statement. What’s driving this? Is it working capital, but you also have sort of other items chewing out cash, and there is a tax item that’s chewing out cash. Can you give us more visibility as to why cash conversion is now a little bit lower?

Brad will provide some specific details, but I want to start by mentioning that working capital in the third quarter was actually 100 basis points better than it was year-over-year. However, it was still below our expectations. It's not related to inventory, as inventory performed as anticipated, and it’s not an issue with payables. I believe we experienced an almost full-day increase in Days Sales Outstanding from the second quarter to the third quarter. This is part of the increase in working capital, which directly impacts cash, and the rise in working capital is necessary to support the strong organic growth we’ve seen over the past two quarters.

Yes. What Bob is saying is that the metrics are actually quite good regarding working capital. We are noticing an increase in accounts receivable, particularly due to our strong revenue growth. Therefore, we expect strong collections in the fourth quarter, which will support robust free cash flow and position us in the 10% to 11% range.

Terrific. Thanks a lot.

Good morning, Deane.

Thank you. Thank you. Good morning, everyone.

Good morning, Deane.

Hey, can we just spend a moment talking about life after the wellsite separation?

Life after the wellsite, yes.

Yes. How will your exposure to oil and gas change? Most of it will likely be in Fluid, bearings, and compression, moving towards Engineered Solutions. If you consider the percentage of revenues, the upstream, midstream, and downstream segments will undergo significant changes, particularly leaning more towards midstream. Could you elaborate on that, please?

Well, we have looked at this; we have the data on this, and it’s been three weeks or four weeks since I looked at it and I’m struggling with recall to give you specific numbers. Obviously, it is down, our wellsite exposure is down. But I would first call out the comment that I made earlier on transportation. We would label this $100 million business in transportation to be energy-related. It may not be all upstream; some of it is midstream, but I would truly label it as energy-related. And bearings and compression, there is some upstream connection to bearings and compression. But it’s not the correlation or the size that we have in the wellsite businesses. And the bulk of it, other than bearings and compression, is connected into the Fluids segment.

Got it. As a follow-up on the material cost inflation in ES, could you provide us with some details? I would have guessed that the pressure might have come from Refrigeration due to the increase in copper prices, but could you clarify the impact there?

I will let Brad…

Yeah.

Let me provide some insights regarding Refrigeration. We began to notice significant material inflation in Refrigeration during the first and second quarters. While I can’t recall the specific numbers at the moment, I believe the impact from material inflation in the first quarter for Refrigeration was around $9 million. We implemented price increases as we concluded the first quarter in this segment. Although we didn’t fully address the inflation in the second quarter, the disparity in material inflation considerably decreased during that period. Given our proactive stance on raising prices in Refrigeration to offset these costs, I do not expect pricing inflation to negatively affect Refrigeration in the second half of the year.

Got it. And Brad was going to size the…

Yeah.

…you want to size. Brad, go ahead.

You want to evaluate it. Coming out of the second quarter, we indicated that we would experience approximately $34 million in net impact on materials for the year, which was our previous guidance. This has now increased to $38 million, primarily due to changes in DES. As Bob mentioned, we had an impact in the first half related to DRFE as they implemented pricing, which will balance out in the latter half of the year. This remains mostly accurate today, with only a minor change. Our DE business is seeing some increases in steel costs and has also implemented price increases starting in October. Essentially, the adjustments are mainly within DES, and our team is actively working on price increases and improving productivity. However, this process will take some time to fully counterbalance.

Got it. And just lastly, and this is not a question, but a comment. Off-road jeep enthusiasts like me are sorry to see the Warn business leave the portfolio today. Let that be noted?

Comment noted, Deane. Thank you.

Hi. Good morning.

Good morning, Julian.

Just a question firstly on the Warn business that you just touched on and I think when you bought that you paid about 2 times, 205 times sales. Just wondered if you could give any color on the sale multiple and what kind of lost operating earnings we should dial in for the next year?

So earnings for the business that was sold for next year are expected to be around $0.10.

Well, that’s the impact.

We experienced lost earnings of $0.10. I want to clarify that we did not sell the entire Warn business; we sold the winch business, including both the consumer and smaller industrial winch segments. What we retained was the OEM component business for the automotive industry, and the revenue from the part that was sold amounted to $130 million.

Yeah. That was.

Yeah.

Very helpful. Thank you. And then my second question, just you saw obviously the big drop in organic bookings in Refrigeration & Food Equipment in Q3. Maybe give a bit more detail around the retail refrigeration softness and whether the cost-cutting that you’ve talked about, the $40 million, is a lot of that waited into this segment? Would you think that that retail softness or that broader booking softness in Refrigeration & Food will reverse soon?

Let me address the cost-saving initiatives first. This effort is quite extensive, although I specifically exclude wellsite activities from this discussion and would not attribute a disproportionate share of activity to Refrigeration. We've seen efforts in the latter half of last year and through the first three quarters of this year that focused on productivity and cost reductions. We expect continued progress in this area during the fourth quarter and into 2018. It's important to note that when I mention broad-based initiatives, I refer to all segments, corporate functions, and regions. Regarding bookings, I would refer back to my earlier observation about the unusual year we've had. The quarterly patterns in this segment have differed significantly from historical trends, contributing to the reduced bookings we experienced in the third quarter. However, this softness is not limited to the Refrigeration sector; we also witnessed a decline in year-over-year bookings for our can-shaping business after a very strong order performance in the second quarter. We anticipate a robust, possibly record revenue quarter for can-shaping, and we believe that the orders secured in the recent quarters position us well for 2018.

Great. Thank you.

Yes. Good morning.

Good morning.

Just to follow-up on Julian’s question on Refrigeration here, if we are looking at comps, they are getting significantly tougher as we go into 2018 for Refrigeration, and if bookings, as you say, remain relatively soft here, I recognize that there is a seasonal issue. But I’m wondering on tougher comps, do you believe this business can actually grow next year? And if volumes aren’t picking up, how should we think about margins?

The segment leadership team and the operating business leadership teams are confident that they can grow this business next year. Looking at it quarterly, the strong performance in the first quarter of 2017 makes it challenging for the Refrigeration platform to achieve positive organic growth in the first quarter of 2018 when compared to the same period in 2017. However, we believe we will return to a more seasonal pattern in 2018, and you should expect to see positive comparisons in the second half of the year.

Bob, do you have the sense that there are enough levers in this business where if your expectation for bookings growth doesn’t materialize, are there things that you can do to address that from a margin standpoint?

Yes.

Okay. And then my follow-up on P&I. So I know your comment is that there is quite good growth over there, but my sense again looking at comps here is that your business slowed even though your comp has gotten a lot easier organically sequentially. So I’m sort of trying to understand the dynamics here, are we talking about different growth in textile versus your marking and coding, is there some lumpiness that I am not getting anything now?

There is a different growth profile between digital and marking and coding. I’m not sure what the specific difference was in the third quarter, but the growth in digital textile was quite strong. Regarding marking and coding, I don't have that number available, but was it 3% organic growth for marking and coding in the third quarter?

Okay. I will follow-up with Paul offline.

Good morning, everyone.

Good morning.

Good morning.

I’d like to talk a little bit about the pumps business in Fluids. You’ve seen some pretty good organic growth here in the last couple of quarters against what are fairly easy comps. The comps do get a bit more difficult here. Is the growth here just a result of the easy comps? Have you seen that business fundamentally improve? And what markets are driving it?

I agree with you. Looking back at the comparisons, the revenue for the pumps group in 2016 was still impacted by the downturn in upstream oil and gas activity. However, we have observed a significant recovery in those applications throughout the year. By the fourth quarter, the comparisons may not be as favorable as in the first and second quarters, yet we are still demonstrating strong organic growth for the pumps business in that quarter. Additionally, our hygienic and pharmaceutical segments are performing exceptionally well, facing challenging comparisons as they also had high growth rates last year. Our plastic and polymer sector, which is more project-oriented, may show some fluctuations when comparing quarters and year-over-year, but we anticipate robust growth in the plastics and polymer business in 2017 and solid growth in 2018 as well.

So it sounds like you’re thinking this is more of a fundamental recovery in the business than it is just a matter of comps in there… would that also grow in ‘18?

It did not…

Okay. That’s helpful. Thanks very much.

Hi. Good morning.

Good morning, Scott.

Good morning.

Looking at the full year organic sales guidance and trying to estimate a fourth quarter number, please correct me if I'm wrong, but it seems like you are suggesting low to mid-single organic. Is that correct, and is that entirely due to the decline in Refrigeration?

For the fourth quarter, organic growth is approximately 6%. The key question is how much of that 6% is attributed to Dover without Wellsite data. I do not have that information, but it is a positive trend. Regarding your comment on Refrigeration, despite the variations in customer buying behavior in 2017, organic growth for Refrigeration in the fourth quarter is around 1%, or slightly more, which is still below our initial expectations.

Okay. So that’s better than I sort of was calculating. Great.

Yeah.

Well, yeah, you should remember there’s some disposition impact in there…

Yeah.

Okay. Fine. Okay.

The other thing is that should we see, and maybe the better question is on the ES margin, could you and I know there’s a question around this earlier. Could you kind of give us sort of the buckets for you had an adjusted drop of 130 basis points. Could you kind of tell us, obviously materials is the biggest issue here, kind of give us the puts and takes, and maybe the sizings of kind of what happened there?

Yeah. Well, Brad can probably provide more specific numbers than I can. But I would say that better than a third maybe approaching 40% of the drop had to do with material inflation, another...

Which we provided you the number.

Yeah. Another third of it, and it may have been slightly more, was due to the increased investment in our digital print activities. There was also a bit of variability related to product mix, which is always the case. I would estimate that 30% to 40% of our material inflation was caused by this, with 30% attributed to the increased investment in digital print, and the remainder being due to product mix. Brad, do you want to clarify that?

No. I think that’s it.

Okay.

Yeah. And if I could sneak in another one in here, just very simply, you made a comment, Bob, that you’re confident that the refrigeration market will improve next year. Could you give us a little bit more behind that thinking?

I will begin by summarizing our discussions with customers, and we anticipate an increase in our activity next year. I do not have a final number yet, as we are currently in the planning phase. We will kick off our planning in about 10 days to finalize our operating plans for 2018. However, we know that we have already been awarded some business, although we have not received the orders yet. I cannot specify the exact order level for 2018, but it will be an increase. Additionally, even if revenue remains the same in 2018 compared to 2017, we see a clear opportunity for margin improvement.

Thanks a lot.

Hi, guys. This is actually Patrick Wu standing in for Charley. Thanks for taking my questions.

Okay. Hi, Patrick. Good morning.

Good morning.

It seems that even though you are moving forward with your rationalization process, the M&A pipeline remains quite strong, and you appear optimistic about it. Can you elaborate on the areas you are exploring and how valuations look right now? Are there any specific areas where you have a strong interest, especially if the valuations are still on the higher side?

We continue to be interested in expanding across various verticals, particularly in our pumps within the Fluids sector, and we are always searching for opportunities. We have identified potential expansions in both our marking and coding as well as in our digital printing areas. However, the areas we are focusing on are consistent with what we discussed at the June Investor Conference. Regarding your question about valuation, it's noteworthy that we have walked away from a couple of recent opportunities because the sellers' expectations on valuation were beyond our comfort level. Consequently, we decided to withdraw and will await the next opportunities.

Bolt-on, add-on.

Nothing large, nothing significant…

Nothing that we walked away from that was directly change…

Okay, I understand. I have one more question about Refrigeration & Food Equipment. You've already addressed many of my concerns, but if we exclude the approximately $6 million in inefficiencies from Hillphoenix last year, that figure year-over-year seems to be down by about 50 basis points or so. What is the remaining impact from Hillphoenix in that business? Is it mostly resolved now? Additionally, Walmart has recently mentioned that they plan to open around 400 online grocery pickup locations this year. Has this provided any incremental benefit for you?

Let me address your question about Wal-Mart first. The impact of their pickup rollout on our business has been minimal. While we have received a few orders, it hasn't led to any significant changes. In the Refrigeration segment, the greatest opportunity for margin improvement lies primarily with Hillphoenix and Anthony, especially Hillphoenix.

Okay. That’s it for me. Thank you.

Thanks, Pat.

Thanks, Paula. This concludes our conference call. With that, we thank you for your continued interest in Dover and we look forward to speaking to you again next quarter. Have a good day.