Dover Corp (DOV) — Q4 2017 Earnings Call Transcript

Thank you, Crystal. Good morning and welcome to Dover's fourth 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 fourth quarter operating and financial performance, and follow with a discussion of our 2018 guidance. 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. Beginning with our 2018 guidance, Dover will provide adjusted EPS guidance and results that will exclude after-tax acquisition-related amortization. We believe reporting adjusted EPS on this basis better reflects our core operating results, offers more transparency, and facilitates easy comparability with peer companies. A full reconciliation between forecasted GAAP and forecasted adjusted measures, reflecting adjustments for the aforementioned acquisition-related amortization, as well as carryover rightsizing costs, is included in our investor supplement. 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 February 13, 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, 7790239. 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 Form 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. I am pleased with our fourth quarter performance, which reflects strong global markets, resulting in broad-based revenue growth and solid margin improvement at each segment. In particular, we had strong organic growth in Pumps, Waste Handling, Food Equipment, and at our well site business. A number of other businesses also turned in solid performances, including marking and coding, vehicle service equipment, and bearings and compression, resulting in organic growth of 8% in the quarter. Our organic growth in the quarter and for the full year, I believe, illustrates the strength of our portfolio. In all, our team's focus and execution resulted in a solid quarter, while also making significant progress on the Wellsite spin-off, right-sizing, and several other commercial and investment initiatives. Our right-sizing initiatives in the quarter were important to align Dover's cost structure with its size post spin. These right-sizing actions are expected to deliver $55 million of benefits in 2018. I am also happy with the progress we have made towards transitioning to a more focused portfolio, with strong platforms and attractive markets. We are firmly on track to achieve our three-year revenue and margin targets, which we outlined at our investor meeting last June. We delivered strong organic growth, and increased adjusted margin over 150 basis points in 2017, and are positioned to deliver further growth in margin expansion in 2018. In conjunction with our portfolio shaping activities, we have continued to build our platforms with two highly synergistic deals which were recently closed. These deals, while not large in scale, are margin-accretive and enable us to expand the scope of our offerings and become a more important supplier to our customers. As we enter 2018, I am excited about our position. The global macro environment is expected to be constructive, leveraged by tailwinds from our productivity and cost initiatives and from U.S. tax reform. In 2018, we are expecting solid revenue growth, strong EPS growth, and another year of strong free cash flow. Our outlook is supported by our continued commitment to our strategy, with a strong focus on margin expansion. I am very proud of the entire Dover team and want to thank them for their hard work and effort, as they continue to focus on serving our customers. Brad will now take you through the specifics of our fourth quarter performance and 2018 guidance, and I will come back at the end for some closing thoughts.

Thanks, Bob. Good morning everyone. As Bob mentioned, we had a solid fourth quarter. We achieved organic growth in all segments and had bookings growth in three out of the four segments. Leverage on this organic growth, combined with benefits of our productivity and cost initiatives, led to strong year-over-year adjusted margin improvement. There were several highlights in the quarter, including broad-based revenue and bookings growth in Engineered Systems, strong performance in Fluids, including broad-based bookings growth; continued organic growth and significant year-over-year margin improvement in refrigeration and Food Equipment; and lastly, strong revenue and bookings growth in Energy. Also, from a geographic perspective, the U.S. and China markets had strong organic growth year-over-year. Let's start on slide 3 of the presentation deck; today, we reported fourth quarter revenue of $2 billion, an increase of 13%. Organic growth of 8% was complemented by acquisition growth of 6%. Partially offsetting these results was a 3% impact from dispositions. FX provided a 2% benefit in the quarter. Adjusted EPS increased 49% to $1.13. This result excludes costs associated with our previously announced right-sizing initiatives, as well as Wellsite separation-related costs, which were both as expected. It also excludes net benefits from dispositions, benefits from the Tax Cuts Jobs Act, and benefits from a reduction to a previously recorded product recall reserve. A full reconciliation of adjusted EPS can be found in our investor supplement. Adjusted segment margin was 14.4% in the quarter, a 210 basis point improvement over last year, primarily driven by incremental margin on increased volume. Bookings increased 13% to $2 billion. This increase is comprised of 8% organic growth and acquisition growth of 7%, partially offset by a 3% impact from dispositions and reflects strong growth in Engineered Systems, Fluids, and Energy. Book-to-bill finished at 0.98. Overall, our backlog increased 15% to $1.2 billion. On an organic basis, backlog increased 10%. Adjusted free cash flow was strong, at $303 million in the quarter, up 26% over last year. For the full year, we generated $703 million of adjusted free cash flow, representing 9% of revenue. While our fourth quarter was strong, we fell short of our full year plan, primarily a result of robust December shipments, which increased receivables in the month. Overall, we are pleased with the progress we have made on working capital this year. Working capital as a percent of revenue was 16.4%, down 280 basis points from last year. Now turning to slide 4; organic growth was broad-based. Engineered Systems grew 8%, driven by solid activity across both platforms. Fluids Organic revenue increased 4%, principally driven by strong activity in our industrial Pumps and pharma and hygienic businesses. Refrigeration and Food Equipment increased 1%, and Energy grew 23% organically. As seen on the chart, total acquisition growth was primarily driven by 20% growth in Fluids. Now on slide 5; Engineered Systems revenue of $667 million was up 8% organically, reflecting broad-based growth. Adjusted earnings increased 9% over the prior year and adjusted margin was 15.7%, representing a 20 basis point improvement. These results primarily reflect volume leverage, partially offset by some material cost inflation. Our Printing and Identification platform revenue increased 3% organically, driven by continued solid activity in our marking and coding business. In the Industrial platform, revenue increased 12% organically, reflecting strong shipments in Waste Handling and robust activity in our vehicle service equipment businesses. Bookings increased 6% overall, including organic bookings growth of 9%. Organic growth reflects solid activity across the segment. Book-to-bill was 1.04 for printing and identification, only 1.0 for industrials due to very strong shipments, and 1.02 overall. Now on slide 6; Fluids revenue increased 26% to $610 million, including acquisition growth of 20% and 4% organic growth. Organic growth was primarily driven by strong performances in our industrial pump and hygienic and pharma platforms. Adjusted earnings increased 61%, largely driven by volume growth, including acquisitions and productivity gains, especially at retail fueling. Volume leverage and ongoing retail fueling integration drove an adjusted margin improvement of 320 basis points, up to 15.2%. Of note, we have recently begun setting up pre-production runs in advance of consolidating retail fueling production facilities in Europe. This consolidation and others in retail fueling will greatly improve margin of this business going forward. Bookings grew 34%, including 9% organic growth. Organic bookings growth was most prevalent in our Pumps and hygienic and pharma platforms. Book-to-bill was 1.01. Now let's turn to slide 7; Refrigeration and Food Equipment's revenue of $377 million included organic growth of 1%. The organic increase was largely driven by the expected strong activity in our can-shaping business within Food Equipment. Refrigeration results reflected the anticipated fourth quarter softness in our retail refrigeration markets, as well as some customer rationalization. Adjusted earnings increased 34% from the prior year and adjusted margin expanded 300 basis points. These results primarily reflect the favorable business mix and significant productivity improvements. Bookings decreased 3% organically, largely due to reflecting tough comps in our retail refrigeration business. Certain customers had ordered ahead of regulatory changes that went into effect in early 2017, which had the effect of softening back half in Q4 trends. Book-to-bill was 0.85. Now moving to slide 8; Energy revenue increased 24% to $364 million, reflecting growth in the U.S. rig count and increased well completion activity, including continued solid results in bearing and compression, which grew 3%. Adjusted earnings were $49 million and adjusted segment margin was 13.4%, both significantly improved over last year. These results were largely driven by strong volume growth. Bookings were up 18% year-over-year. Book-to-bill finished at 0.98. As Bob mentioned, our Wellsite businesses had a strong quarter, with 31% organic growth and grew 34% organically for the full year. Further, we made significant progress on the spin and fully expect to complete the transaction in May. We expect our end markets to continue to improve, and are excited about our prospects as an independent company. Now going to the overview slide; number 9; our fourth quarter corporate expense included $16 million of right-sizing and other costs and $14 million of Wellsite-related separation costs. Excluding these costs, corporate expense was $35 million, a little higher than expected. Interest expense was $35 million. Our fourth quarter tax rate included a benefit of $51 million from the enactment of the Tax Cuts and Jobs Act. The benefit was primarily derived from the revaluation of deferred tax liabilities, offset in part by a U.S. tax charge for deemed repatriation of foreign earnings. Excluding the impact of the tax act and other discrete benefits of $10 million, our fourth quarter effective tax rate was 24.1%. This rate reflects a favorable mix of geographic earnings. For the full year, the effective tax rate was 27.1%. For the fourth quarter, we repurchased 1.1 million shares for $105 million, as part of our previously announced $1 billion repurchase plan. We expect to complete the plan later in 2018, utilizing the dividend received from Wellsite. Moving on to slide 10; please note our 2018 EPS guidance is presented on an adjusted basis. Starting this year, we will be adjusting for acquisition-related amortization and right-sizing costs, and Wellsite separation costs as incurred. Acquisition-related amortization was $0.86 in 2017 and is expected to be $0.93 in 2018. The delta between the years is primarily driven by changes in the tax rate. Moving to the guide; we expect 2018 total revenue to increase 3% to 5%. Within this forecast, organic revenue growth is forecasted to be 5% to 7%. FX should add about 1%, and dispositions are expected to have a 3% impact. All segments are expected to have solid organic growth. The specific rates could be seen on the slide. Our forecast for corporate expense is $122 million and interest expense is expected to be about $130 million. The tax rate is forecasted to be 22% and 23%, four to five points lower than the normalized 2017 rate. This improvement is driven by the tax act. Our forecast for CapEx is 2.4% of revenue, and full year free cash flow is expected to be between 10% and 11% of revenue. Further, we expect adjusted segment margin to improve about 110 basis points over 2017 to approximately 15.3%. In summary, we expect full year EPS to be $5.73 to $5.93. This represents an increase of 19% over 2017 on an adjusted basis at the midpoint. Our guidance does not include any 2018 costs related to the Wellsite separation. With that, I will turn the call back over to Bob for some final comments.

Thanks, Brad. As expected, 2017 proved to be an exceptionally busy year for Dover. During that time, we have remained highly focused on the three-year goals we shared at our Investor Day in June. For the period of 2017 through 2019, we communicated our targets to be 4% to 6% organic growth on an annual basis and cumulative adjusted margin expansion of 350 to 450 basis points. Although we know there is still much to be done, I am pleased with the progress we made in 2017. On the revenue side, we performed very well against the three-year plan, generating 8% organic growth. Every segment hit their organic revenue plan. I would also like to point out that the businesses that propelled our growth in 2017 remained strong in 2018; namely, marking and coding, digital printing, and Waste Handling are all set up to have a strong year within Engineered Systems. In Fluids, we expect another year of strong growth in our Pumps and hygienic and pharma businesses. Refrigeration and Food Equipment should once again deliver steady growth, and our Energy businesses are well positioned for double-digit growth. Looking forward, we expect E&P related activity to be slow in the first half with tough comps, driven by the compliance date delay we have previously discussed. We also expect retail refrigeration's first half to be impacted by tough comps related to last year's strong shipments in advance of regulatory changes. We are forecasting organic growth of 5% to 7% in 2018, a full point above the target in our three-year plan, and we are confident we will deliver. In 2017, adjusted segment margin improved more than 150 basis points, and we are on pace towards our three-year target range. With respect to margins, in Engineered Systems, we fell a little short of our 2017 target, primarily due to significant material cost inflation. We feel better about price costs as we enter 2018 and are also forecasting reduced investment as compared to a heavy investment year in 2017. In Fluids, commercial excellence programs, productivity, and our retail fueling integration have been and will remain the main drivers of margin enhancement. Refrigeration and Food Equipment's margin grew nicely in 2017 on improved productivity, especially within retail refrigeration, and we expect further progress in 2018. And finally, Energy's strong margin growth is primarily the result of volume leverage, which we expect to continue in 2018. In total, we expect more than 100 basis points of margin improvement in 2018, and our teams are aligned around achieving this goal. In closing, I feel that Dover is exceptionally well positioned in 2018. Our markets are healthy, and we have tailwinds from U.S. tax reforms and our right-sizing initiatives. We expect to deliver a very strong year in terms of EPS growth and will remain disciplined with respect to capital allocation. We will return cash to shareholders by completing our $1 billion share repurchase and by raising our dividend for the 62nd straight year. And we will continue to expand and enhance our platforms through margin-accretive bolt-on acquisitions and investing in organic growth. Now Paul, let's take some questions.

Thanks, Bob. Before we take the first question, I'd just like to remind the listeners, if you can limit yourselves to one question with a follow-up, we have a lot of people in queue, and we will be able to hear more questions. So with that, Crystal, if we could have the first question?

Good morning.

Good morning, Andrew.

Just a question; earlier in the year, you highlighted smaller acquisitions, something you haven't done before. Can you just comment on why all of a sudden you are putting out press releases on these smaller deals and your approach to capital allocation going forward, given Wellsite, and now that we have visibility on taxes, how should we think about capital allocation going forward?

So your first question about press releases is that.

Yeah. You are highlighting smaller deals, which I don't think you have done in the past?

We just thought they were important to announce, Andrew. I mean, there is nothing magical about it.

And how should we think about capital allocation going forward?

Let's stay first with the share repurchase program that we announced in the fourth quarter, and I think we will have the bulk of that completed by the time we complete the spin in May of Wellsite. As we sit here today, I do not have anything significant in our acquisition pipeline, that we would expect to close on in the first five or six months of 2018. If 2018 does prove to be a light year with respect to M&A activity, I think it's very reasonable to expect the board and I to have further discussions around share repurchases for the second half.

Terrific. And just a follow-up question on revenue outlook; a lot of companies sort of don't seem to indicate impact of tax reform on demand in their revenue outlook? Where do you guys stand about potential upside to revenue from the tax reform?

It's not included in our guidance. I believe my answer is likely simpler than what you will hear from other capital goods manufacturers this earnings season. Looking at the Dover portfolio, approximately 30% of our revenue is recurring. Of the remaining 70%, about 80% consists of either capital goods or components we produce that are used in capital goods. A significant portion of that 80% is based in the U.S. In fact, I think our earnings split for 2017 was 60% domestic and 40% non-domestic, is that correct?

That's close. Right.

I think we will observe two or three areas for increased capital goods activity that could be a reaction to the tax act, and we will notice it. In the industrial platform of Engineered Systems, I believe we will see it in retail fueling and potentially also in refrigeration, especially within the Hillphoenix and Anthony business.

Thanks a lot, Bob.

Yes.

Good morning. This is Chris filling in for Steve. I would like to get more insight on refrigeration. Could you explain the mix versus productivity in the 300 basis points of adjusted margin expansion? Additionally, how far along are you in adjusting the model and improving factory performance? Looking ahead to next year, what do you believe the margins will be like and what is the ideal organic growth rate within the 3% to 4% range?

I don't have specific details on the margin improvement you asked about. Most of the improvement comes from our productivity initiatives, but I can’t provide exact numbers or percentages. Productivity has played a significant role. Additionally, we implemented some price increases in 2017 earlier than in our other businesses due to material inflation, which I believe contributed positively. We've also made some smaller adjustments, including exiting certain product areas that have historically underperformed, as it became clear we couldn't improve the margins to our desired level. I don't recall the exact figure, but it might be around $40 million in revenue that we exited in 2017.

And another $40 million to $50 million in 2018.

In 2018 that we have exited, just because we didn't like the margin profile.

Okay. And then, just quickly on just the EMV adoption within retail skewing. How much of that was full dispenser replacement versus just the payment?

I don't have that data. In 2017, the bulk of our EMV activity as we have reported in the past was in the first half of the year. We continue to see some activity in the second half, but nowhere near what we saw in the first half. We are taking a pretty cautious approach to the 2018 guide. I would say that the 2018 guide has less EMV activity, pure EMV activity in the guide than we actually experienced in 2017, and I will repeat myself, I think that's cautious and conservative. We do believe that the EMV activity will begin to pick up in the second half, and we will provide further cover on that activity on the April and the July call, and my hope is that it gives us an opportunity to raise our guide as we move through the year.

Thank you.

Thank you. Good day everyone.

Good day, Jeff.

First question, Bob. It might actually have multiple parts, but this relates to some of the guidance dynamics. You mentioned that the guidance excludes one-off costs from Wellsite, but I am curious if it fully represents the total costs we will incur when there are two companies. Specifically, does it account for the restructuring you're undertaking, including what might be termed as stranded costs after the formation of the new company? Additionally, regarding the guidance, I noticed the range of $0.28 to $0.26 for commercial and product investment. I've not seen that specified before, and I certainly don't recall it. That's a significant amount. What does that entail?

Let me address the first question. In the fourth quarter, our right-sizing efforts amounted to about $45 million or $46 million, and there is some carryover included in our guidance for 2018 related to right-sizing costs, estimated at around $11 million. Most of this will likely occur in the first quarter. Additionally, we anticipate another $10 million to $12 million in restructuring costs for 2018, which we consider normal recurring activities we have handled in recent years. Concerning the final separation of Wellsite from Dover, we will encounter some stranded costs that we will manage at the time of the spin or shortly after. However, these costs are quite modest, estimated at around $3 million or $4 million.

As reflective of the activities we have been taking, we have narrowed it down to about $3 million to $5 million. Still looking at more ways to reduce the stranded costs inside Dover. Jeff, keep in mind that when Wellsite goes, the easiest way to think about this is, so do all the segment of DE Energy, the segment costs. Soma and his team and the costs they incur at the segment level go with the spin. So that in essence is taken care of through the spin activity. They will have to add incremental costs above that number, as a new public company, we say 35. But in reality, it's a smaller piece, because the segment already is staffed up than 35. I hope that helps.

That does help. And regarding that bridge item, what can you tell me about the commercial and product investment categories?

That may be a change regarding our external communication. However, I wouldn't consider it something new within Dover. We are planning a significant amount of investment in 2018 for commercial facing activities.

Including digital.

Including our digital activity. And we do have a fair amount of projects around Dover in 2018 for productivity, which we have a tendency to support, not only with people assigned to productivity, but with capital. But I wouldn't look at it as a different activity, it is a slight change in how we present it.

Okay. Just one more point before I move on. Regarding Energy, it seems that the margin, which is good year-over-year but down from the previous quarter, indicates a slowdown in drilling activity. We are beginning to see some progress with confusion activities.

I wish the duck were quacking more, Jeff.

Yeah. Can you just kind of walk us through what's happening?

In the fourth quarter, we observed a couple of unexpected trends within Energy and Wellsite. Drilling activity was slightly lower than anticipated, particularly in November and December, compared to our expectations earlier in the quarter. A key market indicator to note is that rig count activity was relatively flat in the fourth quarter, and we had anticipated more growth. Additionally, regarding well completion activity, we did not see the expected growth in our rod lift business. Conversely, we experienced more pull-through in our ESP business than we planned for, though ESP margins are generally five to six points lower than those of rod lift. We noted from many of our customers that CapEx budgets were largely exhausted by November and early December. However, January has started off strong, with rig count activity increasing significantly. In fact, the increase we saw last week was the largest in this recent upturn. Drilling activity has picked up, surpassing our January plans, and our artificial lift business is on track.

Thank you.

Hey guys, good morning.

Good morning, Steve.

Hey, what is the tax rate on the amortization add-back? It appears to be higher than your guidance for the future. Can you explain the difference?

We are applying a tax rate based on the location of the amortization, specifically the statutory rate in that area. To clarify, since we have made acquisitions in various regions worldwide, we are using this statutory rate on a blended basis across all of them.

Okay. So that's not going to change with tax reform?

No.

Okay. And then, free cash flow, still pretty solid, but a little bit light of what we were expecting. It looks like there was, we don't have the details yet, but perhaps some working capital. Can you just talk about what your assumptions are there going forward? Is this just a little bit of a working capital build on the back of better volumes? I think you guided to 11 or 13 or something like that, so just curious on the free cash flow front?

No, no, no. Don't take the 13%. We got into 10% to 11%.

No, we were expecting something a little bit higher this year, specifically.

I was somewhat disappointed with our cash flow results for the year, as we didn't achieve the 10% target, Steve. However, I want to note that in 2017, we managed to reduce our working capital by 140 basis points year-over-year. In the fourth quarter, we experienced stronger revenue in December than we usually expect based on previous years. Typically, we would see some receivable liquidation during December, but with the increased revenue, that didn't occur. For the most part, cash collections weren’t an issue, even though we didn’t manage to reduce our receivables in December as planned. We did experience slightly higher outflows in a couple of areas than anticipated. Capital expenditures were greater in the fourth quarter than we had intended, and our tax payments might have exceeded what we expected. Even with these adjustments, we could have come close to the 10% target but not exceeded it.

Okay. And then lastly, any price costs, headwinds in your guidance for 2018, steel and like that?

That's a good question.

Thanks for that.

In 2017, we faced a negative impact of nearly $15 million regarding our material costs compared to pricing, primarily occurring in the first three quarters. Looking ahead to 2018, considering the current material costs and the pricing strategies we implemented in the latter half of 2017, we anticipate a shift. We expect a favorable impact ranging from $13 million to $15 million in our guidance for material costs versus pricing.

That's all-in bulk price.

Yeah, that's all in.

Great. Okay. Thanks, guys.

Yes.

Thank you. Good morning everyone.

Good morning, Deane.

Hey Bob, can you expand on the comment in refrigeration when you said you saw and had some customer rationalization? Just kind of expand what was going on there and maybe size the impact if you could?

Throughout the year, we experienced ongoing developments. It wasn't solely a fourth quarter phenomenon. In the first quarter of last year, we turned down approximately $20 million in retail refrigeration business because we felt the margins were unsatisfactory and did not see a path to improve them to meet our margin goals for that segment. In the fourth quarter, we sold a small glass door business in China, which we had been actively trying to enhance for growth and margin improvement but had not achieved success. Additionally, in the fourth quarter, we discontinued our aftermarket service business in Canada, which generated around $10 million in revenue. The glass door business in China was also about $10 million. Overall, these actions contributed to a total impact of around $40 million.

Do you have more planned for the first quarter, or has that already concluded?

I would say that it has run its course.

Okay. And then on the Energy side, just last question for me, can you clarify whether some of the uptick in the Energy was the recovery from the hurricane dislocations that you saw in the third quarter? I think you had sized it like $0.04 in the third quarter, did that all get recouped here in the fourth quarter?

The $0.04 I mentioned was a preliminary estimate I provided around mid-September, reflecting the risks at that time. However, by the end of the third quarter, our business teams did an excellent job closing the gap, and I believe we were only a penny off due to the hurricane. Therefore, I wouldn’t attribute much of the activity in the fourth quarter to the storm disruptions from the third quarter.

Got it. Thank you.

Hi. Good morning guys.

Good morning, Scott.

Can we just refresh our memories a little bit or refresh my memory I should say, on Pumps. How much of that business goes for distribution versus direct? And I guess part of the question I am getting at is that, the growth you saw, is there some restocking going on that folks want to make sure they are geared up for higher operating rates?

No. Within Pumps, including our PSG business, our indiscernible business, and our hygienic and pharma segments, around 60% of it comes through distribution, with the remaining portion being direct to the end user or an integrator. Regarding your question about restocking, I believe most of that activity took place in the second and third quarters. What we observed in the fourth quarter and what we anticipate for 2018 is genuine end market demand.

Right. Okay, that's helpful. And then I don't think you said this, and if you did, excuse me. But can you just give us a bit of a walk around in the world, I mean, where you saw strengths and weaknesses globally versus your model?

For the fourth quarter?

Yeah. For the fourth quarter.

I would say that China and the U.S. market activity was a bit stronger than we anticipated. In fact, Scott, it was interesting, organic growth in the U.S. in the fourth quarter was a little better than 10%. We saw good organic growth, double digits in China, and in Europe, we saw flat. It was relatively flat versus the fourth quarter of 2016. But I would give our business teams a little color on that, by pointing out that the fourth quarter of 2016, we had some pretty healthy, I call them project shipments in Europe in the fourth quarter of 2016. But almost 11% of the U.S. was a little bit stronger than we anticipated.

Interesting. Okay. Very good. Thank you. I will pass it on.

Yes.

Hi everyone.

Good morning John.

Hi Bob, Brad, and Paul. I am approaching about $4 on Dover Remainco based on the old accounting. So whether we include or exclude the amortization, excluding Wellsite, is that about the figure, Brad? If so, regarding your guidance for 2018, what growth rate would that indicate? I'm trying to understand how you are projecting your EPS or your thought process around EPS on an apples-to-apples basis, excluding Wellsite.

I would like to start by mentioning that we will provide more clarity on this during the April call as we approach the spin date in May. However, please keep in mind that as Wellsite is released, there are two important points to consider regarding our model by April. One is that our forecast or guidance for 2018 does not include the current plans for the buyback that we intend to initiate once we receive the cash.

The dividend.

The dividend. So the stock will be bought back in that May timeframe, once we receive the dividend. And then secondly, just to give you a little bit of a sense of what direction it goes in. Wellsite is mostly a U.S.-based earner and so the tax rate for us will probably move closer to the low end of the range and they will be slightly above the range we gave. And so that will have implications to your modeling as well. That's probably about all I would comment on at this point, put aside, waiting for April.

All right. So Wellsite, just to recap, when you said Wellsite, it's going to have a higher tax rate, and the Remainco businesses are going to have a lower tax rate, I am sorry, is that what you said?

That's what I said.

In the range? Okay.

I would mention that regarding amortization, we have started reporting this way. Considering the amortization, we indicated $0.93, with the portion related to Wellsite being approximately $0.23 or $0.24.

In the quarter, the restructuring you included was about $2 million. How did that measure against your plan, and what is the plan for 2018? You mentioned something about it, Bob, but I’m still not clear on what is included and excluded. Didn’t you say we would be doing $18 million to $20 million of restructuring in 2017?

Yeah, we had said that around $18 million to $20 million, that's kind of normal for a given year. I think the fourth quarter was a little lighter, to your point. Your number is not that far off for the quarter, and for the year, we did about $13 million or $14 million, so lighter compared to the original forecast that we gave. In 2018, we have $11 million of right-sizing carryover, so again $45 million, $46 million in the fourth quarter, $11 million in the first quarter, maybe just a little bit falls into the second quarter, but most of that in the first quarter. And then we had built in to our guidance, what I'd call normal restructuring, things that we do every year, we have been doing for five years, of around $10 million.

Okay. So, we are seeing a lighter forecast compared to what we initially projected, which was around $13 million or $14 million. In 2018, we have $11 million from right-sizing carryover, resulting in approximately $45 million to $46 million in the fourth quarter and $11 million in the first quarter, with a small portion possibly extending into the second quarter but primarily in the first quarter. Additionally, we factored in our usual annual restructuring costs, which we've been doing for five years now, amounting to about $10 million.

Figure all in, right-sizing and restructuring in 2018 of $21 million.

Of which we are excluding the $11 million, is that right?

Yeah.

And you are keeping the $10 million? The reason that's $10 million versus $18 million to $20 million is because Wellsite is not there, is that the biggest chunk of it?

I would say that the right-sizing has addressed many issues, but as I mentioned earlier, I don’t believe we have reached a conclusion yet. Bob can elaborate on this. I’m not currently expecting that we will end up at $21 million. It seems more likely that we might see that number increase.

Should be higher.

Incremental, not dramatically different, but incrementally higher, as we continue to work through and get closer to the spin-off date. Do you want to add anything on that, Bob?

No. And the $12 million, would I label as normal and ordinary type of restructuring? John, you have to appreciate that we know what those projects are. As we roll through the first and second quarter, I fully expect the business team leaders to identify other opportunities, and if it makes sense, we will do it.

And then just lastly, Bob, refrigeration, when you were transitioning your ops to smaller lot sizes and bulking the sort of more flexible production systems if you will, did that completely through so that refrigeration margins today are going to be a function of volume and obviously associated pricing mix or is there still work to do around that front?

No, I believe we have largely completed our work on reducing lot sizes. However, this does not mean there aren’t more productivity projects to pursue this year and next year, because there certainly are. In the fourth quarter, we actually closed one of our case factories and consolidated all case manufacturing into a single facility, which resulted from many of the productivity initiatives we've undertaken over the past two years. This change was made to respond to the variations in lot sizes and some of the process improvements we’ve implemented. The team did an excellent job in 2017, and I know you are eager to see them build on that success in 2018.

And lastly, sorry, core variable margin contribution, 19, based on your guide, ex-Wellsite, what do you think that is, Brad?

I don't have that number.

No, but it has historically been in the 30%-35% range.

I'd say it's a little bit higher than that. I think that with all the productivity, and again, I am doing this on an adjusted basis, adjusted to adjusted year-over-year.

Yeah. That's why I am asking.

It's a little bit higher than that. I'd say it's closer to 38%, 39%.

Okay, awesome. Thank you very much.

Yes.

Thanks, Jeff.

Hey guys.

Good morning, Andrew.

Bob, I just want to go back to refrigeration for a second. Maybe just talk about your confidence level in growing that business 3% to 4% in 2018. Obviously, we have seen the book-to-bill relatively weak a little, last two quarters. But do you have the visibility towards bookings growth in the first half of the year, and should we thinking that 2018 is basically back half loaded a bit on the easier comparisons in the second half of the year?

Okay. Well on comps, it may appear to be back-end loaded. I would say our expectation for 2018 for the food retail business, this is Hillphoenix and Anthony, I think it's going to return to the more traditional seasonal pattern that we have seen over the last seven, eight or ten years, and that would be that the second quarter and the third quarter are the ramp and the heavy build seasons, with the first quarter and the fourth quarter being, I'd call it, the shoulder seasons. And that's quite different than what we experienced in 2017. The order rates that we are expecting in the first quarter to support our plan for the first quarter and our ramp for the second quarter, I can tell you that here in January, our order rates are on plan. So we actually feel rather confident with our target and our guide on refrigeration.

You still available, Andy? I guess Andy is gone. Crystal, you're still there. Is anybody there?

Okay. Thanks.

Thanks, Chris. So yeah, this concludes our conference call. As always, we thank you for your continued interest in Dover, and we look forward to speaking with you again next quarter. Have a good day. Bye.