Dover Corp (DOV) — Q1 2018 Earnings Call Transcript

Thanks, Jennifer. Good morning and welcome to Dover's first quarter earnings call. Today's call will begin with comments from Bob and Brad on Dover's first quarter operating and financial performance, and will follow with our 2018 guidance. We will then open the call up for questions. As a courtesy, we kindly ask that you limit yourself to one question with a follow-up. Dover's providing adjusted EPS results and pro forma EPS guidance that 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 adjusted measures, reflecting adjustments for the aforementioned acquisition-related amortization, as well as separation costs and the 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 May 11 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, 7788105. And 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. Our first quarter performance reflects continued broad based strength in our industrial markets. We generated 4% organic growth and delivered margin improvement in three of our four segments. In particular, we had strong organic growth in environmental solutions, printing and identification, heat exchangers and our upstream energy businesses. A number of other businesses also turned in solid performances including Pumps, vehicle service equipment and industrial ventures. Retail fueling revenue was in line with their expectations whereas retail refrigeration was lower than expected reflecting tough comparisons in market conditions. With regard to margin, we delivered 70 basis points of improvement year-over-year and expect further increases in coming quarters especially in fluids and refrigeration equipment. We performed well in engineered systems in energy. Refrigeration and Food equipment was below expectations on lower volume. Fluids margin were slightly off reflecting some temporary inefficiencies regarding our factory consolidation in Europe and all our teams have done a nice job this quarter, pushing pricing through to offset material cost inflation especially for steel. We also had strong organic bookings in Engineer Systems and Fluids positioning these segments well as we move through the second quarter. The team made great progress on the spin off during the quarter and on May 9th, Apergy will become a fully independent company. During the quarter, we also announced a management transition. Rich Tobin will begin his tenure as President and CEO on May 1st, I'm very pleased Rich has joined us and I'm excited to see him put his stamp on the company. Let me take a moment to cover several other things happening across the company. We have continued to make progress on our digital efforts, our remote monitoring and IoT solutions and retail fueling and environmental solutions have enabled us to win significant new business. We're actively developing several focused offerings to help our customers manage costs and improve productivity. Our pipeline is developing nicely. We have bolt-on target companies in multiple areas that add either technology or market presence which is complementary to our existing business. And lastly, we are well positioned to take advantage of the constructive global macro environment as most of our businesses are booking well and are poised to deliver solid organic growth this year. We had provided pro forma 2018 guidance, which excludes our upstream energy business. We expect solid revenue growth and strong EPS growth. Brad will now take you through the specifics of our first quarter performance and our guidance, and then I will come back for some closing comments.

Thanks Bob. Good morning, everyone. As I take you through the next few slides, please note they are being presented inclusive of our upstream energy businesses. As Bob mentioned, our results reflect organic revenue and bookings growth in three out of the four segments. Leverage on this organic growth, combined with benefits from our productivity and cost initiatives, led to solid year-over-year improvement in adjusted margin. There are several highlights in the quarter; including broad based revenue and bookings growth in Engineered Systems, within Fluids, we had strong performance in our industrial pumps, pharma, and international retail fueling business, as well broad based bookings growth across the segment. And within Refrigeration and Food Equipment, we had strong growth in our heat exchanger and can-shaping business. In the quarter, we also experienced temporary operating efficiencies including parts availability issues in retail fueling and weaker than expected market conditions in retail refrigeration. From a geographic perspective, the U.S., Europe and China markets all grew year-over-year. Let's go through the details starting on Slide 3 of the presentation deck. Today, we reported first quarter revenue growth of 6%, which includes organic growth of 4% and 1% from acquisitions. Partially offsetting these results was a 3% impact from dispositions. FX provided a 4% benefit. Adjusted EPS increased 26% to $1.16. This result excludes acquisition-related amortization cost, as well as costs associated with our previously announced right-sizing initiatives, and separation-related costs. A reconciliation of adjusted EPS can be found in our investor supplement. Adjusted segment margin was 12.5%, a 70 basis point improvement over last year, primarily driven by incremental margin on increased organic growth. Bookings increased 4% overall. This includes 4% organic growth, which reflects strong results in Engineered Systems and Fluids. Excluding Apergy, organic bookings also increased 4%. Book-to-bill finished at 1.10; excluding Apergy, book-to-bill was 1.12. Our first quarter adjusted free cash flow was as expected, reflecting a slight increase in working capital and higher compensation payments. Overall, we are pleased with our continued progress on working capital. Specifically, working capital as a percent of trailing 12-month revenue was 17.5%, down 200 basis points from last year. Now let's turn to Slide 4. As previously mentioned, 4% organic growth was driven by broad-based growth in both Engineered Systems and Energy. Fluids Organic revenue was essentially flat; industrial Pumps and international retail fueling were largely offset by U.S. E&P activity, which came in soft as expected. Refrigeration and Food Equipment decreased by 7% primarily due to a combination of tough comparisons and lower capital spending in retail refrigeration markets. As seen on the chart, foreign exchange was a 4% benefit while dispositions impacted revenue by 3%. Now, turning to Slide 5. Engineered Systems revenue was up 8% organically, reflecting broad-based growth. Adjusted earnings increased 15% over the prior year and adjusted margin was 15.3%, representing a 110 basis point improvement. These results reflect solid conversion on volume and the ability to mitigate increasing material costs through pricing. Our Printing and Identification platform revenue increased 4% organically, driven by continued solid activity in both marking and coding and digital print businesses. In the Industrial platform, revenue increased 10% organically, reflecting strong shipments in Waste Handling and broad-based growth across other businesses. Bookings increased 6% overall, including organic bookings growth of 8%. Organic growth reflects continued solid activity across the segment. Book-to-bill was 1.01 for printing and identification, and a very strong 1.19 for industrials, and 1.11 overall. Now on Slide number 6. Fluids revenue increased by 5%, including acquisition growth of 1% and 4% from FX. Organic revenue was flat, principally reflecting solid pump international retail fueling and pharma market offset by U.S. E&P activity. Adjusted earnings increased 7%, largely driven by volume growth. Adjusted margin increased by 20 basis points to 10.2%. This performance reflects earnings on volume largely offset by temporary inefficiencies including supply chain shortages of components used in retail fueling. Additionally, productivity will improve as the retail fueling factory consolidation is completed in the second quarter resulting in substantially improved margins on a sequential basis. Bookings activity was strong and grew by 11% overall, including 6% organic growth. Organic bookings growth was broad-based. Book-to-bill was a strong 1.13. Now let us turn to Slide 7. Refrigeration and Food Equipment revenue organically declined by 7%. The decline is largely driven by tough comparisons and weaker than expected capital spending in retail refrigeration. Last year we saw seasonally strong first quarter activity in front of the new DOV energy efficiency regulations. We knew that this volume wouldn't repeat in 2018, whereas our can-shaping and heat exchanger businesses performed very well in the quarter. Earnings decreased 13% from the prior year, and margin contracted by 80 basis points reflecting the impact of lower volume. Bookings decreased 14% organically largely reflecting softness in retail refrigeration market and order timing in can-shaping equipment. Book-to-bill was 1.01. Now on Slide 8, Energy's organic revenue increased by 17% reflecting growth in the U.S. rig count and increased well completion activity and it includes continued solid results in our industrial winch business. Earnings and segment margin both significantly improved over last year. Bookings were up 14% year-over-year. Book-to-bill finished at 1.03. As Bob mentioned, our Apergy business had a strong quarter with 22% organic growth. Going to the overview on Slide 9, our first quarter corporate expenses included $12 million of separation costs and $1 million right-sizing costs; excluding these costs, corporate expenses were $29 million. Interest expense was $34 million. Our first quarter tax rate was 22.6% in line with expectations when excluding discrete benefits. In the first quarter, we completed $45 million of share repurchases as part of our previously announced $1 billion repurchase plan. Now moving on to Slide 10, which shows our updated 2018 guidance? Our updated guidance is presented on a pro forma adjusted basis, as discussed last quarter. We're adjusting for acquisition-related amortization and right-sizing costs and separation costs as incurred. Further updated guidance now excludes Apergy for the full year. Lastly, within our updated guidance, bearings and compression, which were part of our energy segment will be reported within fluids. And Tulsa Winch, which was also part of the energy will be reported in Engineered Systems. Moving to the guidance, we expect 2018 total revenue to increase by 4-5%. Within this forecast, organic revenue growth is expected to be 3%-4%. Acquisition will add 1% and FX should add about 3%. Dispositions are expected to have a 3% impact. All segments are expected to grow organically. Further, we expect adjusted segment margin to improve by about 50 basis points over 2017 to approximately 15.1% at the midpoint. In summary, we expect full year adjusted EPS of $4.70 to $4.85. Our guidance excludes second quarter costs related to the Apergy separation. Further, this guidance represents an increase of approximately 15% over 2017 at the midpoint. With that, I will turn the call back over to Bob for some final comments.

Thanks Brad. Going forward, the strong bookings in Engineered Systems and Fluids, along with our strong book-to-bill supports our organic revenue forecast. Additionally, we expect marking and coding, digital printing, and waste handling to continue to perform very well. In Fluids, we expect another year of strong growth in our pumps and pharma businesses. We also expect bearings and compression to be solid, and retail fueling to sequentially improve. In Refrigeration and Food Equipment, we expect continued strong performance in heat exchangers and can-shaping equipment, while retail refrigeration will improve in the back half of the year as several customers step up their remodel activity. With regard to the second quarter, we expect both Engineered Systems and Fluids to deliver solid organic growth as they ship under strong order books. Retail refrigeration in the second quarter will continue to be impacted by tough comparisons related to last year's strong shipments and softer overall markets. We also expect to see improved margins on a sequential basis in all three segments, especially in fluids and refrigeration and food equipment segments. I believe that Dover is well positioned in 2018. In closing, I just want to say that it has been a great honor and pleasure to serve as Dover's CEO these past nine years and I would like to personally thank every Dover employee for contributing to our success. I wish you all well and I am sure you'll have continued success in the future. Now, Paul, let's do some questions.

Thanks Bob, before we take questions, I just want to remind everybody that if you can limit yourself to one question with a follow-up, we'll be better able to handle the 18 analysts that are in queue right now. So with that, Jennifer, let's take the first question.

Thank you, good morning everyone. Bob, congrats on a good run; enjoy your retirement, thanks for all your help over the years, much appreciated. Hey, I know you don't want to speak for Rich and you made the comment about him putting his stamp on things, but is it safe to assume that given that he's on the Board, this guidance and the outlook we're getting today kind of conforms with his views of the world as well?

He is not inherently part of the guidance provided today, I can guarantee you that, Jeff. I think the forecast and the guidance we have shared with you today with respect to engineered systems reflects the very strong visibility we have for them in the second quarter. And I would also say the third quarter. With the fourth quarter, I think we are being a bit conservative with our outlook in engineered systems. And on fluids, I will tell you, we didn't share this in the comments, in the prepared comments here but we were very, very pleased with the order activity in retail fueling in the first quarter, especially as it built through the quarter, and have pretty strong confidence that we are going to see sequential revenue and margin improvements in this platform and in this segment as we move through the year. I think the last thing I would want to do is Jeff as Rich is coming on board would be to raise guidance because I don't think it's necessary today. I think if there's going to be any change in guidance with respect to our strong activity I'm going to leave that for Brad and Rich to speak to you about on the July and the October call.

Great, understood and then I just wonder if we could drill a little bit more in the refrigeration for a moment then obviously there's a lot of uncertainty among grocers in particular on CapEx they want to spend and what they want to spend on and that sort of thing. Can you just provide a little bit more detail on what you're hearing from the channel? Do you see capital spend perhaps freeing up later in the year and is there any particular price-cost dynamics that influenced the margins in refrigeration in the quarter?

So let me deal with the first one. I think there is a growing confidence as a result of input and conversations we're having with customers that we will see increased capital spending in the second half of the year. But, Jeff, I will tell you it is going to be very much driven by remodel activity, not new store construction. And without sharing the name of the customers, we have a couple of new customers that entered the order books in the second half of the year as well. So I feel pretty good with the outlook right now for refrigeration. Material and cost are pricing, I'll give you a response on refrigeration but I think it's just as important I give it for all of Dover. We entered the year with about $14 million of what we labeled as a tailwind for 2018 in terms of pricing. Some of that has evaporated, Jeff. I think I had thrown out the number $14 million on the January call and I would say our forecast right now and our guidance assumes that $10 million of that $14 million has dissipated. But we have been much quicker this year than we were last year in pushing pricing through and many of our companies especially the larger users of steel have implemented price increases during the first quarter, we are taking orders now that have the new price increases in them. And feel like we have got a much better start on covering the material cost inflation with our price increases this year than we did last year, across the board.

Thank you. And I would like to just congratulate Bob and wish you all the best. On just looking at that slide in the appendix, you talk about the $0.05 of the EPS this year coming from incremental share repurchase. Just wondered what sort of dollar number of buyback spending that tallies to, and if there had been any change in the aspiration to spend the spin dividend all on buybacks this year?

Well, I'll give you a headline comment or response on that, and Brad can provide a bit more detail. So the nickel change in our guide with respect to share repurchases does assume that the dividend we received from the Apergy spin will be fully allocated, 100% allocated to share repurchases in 2018. That said Julian, I will tell you the nickel increase in the guidance is as conservative as we can make it with respect to the share repurchase activity. It does not assume an early ASR with respect to share repurchases; it is feathered in our guide to occur during the balance of the year following the spin of Apergy. I will leave to Rich and to Brad and to the Board to make their final decision on how those share repurchase activities actually occur. But I'll repeat myself. The nickel could not be any more conservative in our share repurchase activity.

So let me just add a couple of facts here. Our forecast is assuming about 140 to 154.6 million shares weighted average for the year. Remember the timing of the nickel can be done lots of different ways to Bob's point. But the power actually comes forward into 2019, where we see those shares opening up 2019 in that 140 to 145 million to 146 million type of share range on spending of that $700 million. So, you have this carryover benefit going into 2019.

Very helpful, thank you. And then my follow up would just be around the corporate cost, the guidance has gone up about $7 million. I guess that's mostly costs that were in Apergy that are sort of stranded at the remaining company for now. But I guess when you think about what that number should be feel revenue based excluding Apergy, how much lower do you think that run rate should be than the $129 million? I guess the stranded costs would go away and then some of that base corporate cost also should be coming down because of the smaller revenue base?

Well, one of the right-sizing we did last year, as you know, and that's why we call it rightsizing, getting ready for the Apergy spin. You're correct that our previous guidance I believe was $122 million; now it's $129 million. A little, almost $5 million of that I would say is this Apergy stranded cost that we've shown here in corporate. Of that $5 million, we've got to work through the details on that. We have been working through the details; some of it will go away, a lot of it will go away into 2019, but some of it is fixed infrastructure, a building for instance that doesn't go away. But we're active on it. We're on top of it. We expect to continue to work it down and I would expect the corporate cost number to continue to come down a bit into 2019.

Yes, good morning. And Bob, congratulations on your retirement and thanks for the hard work over the years. Just one question given all the macro concerns, just wanted to drill down into one of the businesses, specifically on printing and IT. Could you provide more detail by geography and end-markets both on sales and what are you seeing on orders? Are you seeing signs of a slowdown in any specific market or any specific geography?

Okay. I don't have the detail with me; the geographic detail for printing and IT, though I do know in the first quarter that order rates were extremely balanced around the globe. There was nothing unusual in growth rates on order activity in the first quarter that would raise any concerns, but I don't have the specific numbers. And order activity, the answer is no. We have seen no sign; no evidence in our order book would actually speak just the opposite of your question that the order activity built through the quarter. And we are booking at a fairly solid rate for 2018, especially at Markem-Imaje with another double-digit growth rate in our digital print business.

And just a follow up on refrigeration and food equipment question, given sort of the weakness of organic orders in the first quarter you are saying that you are seeing a pickup in orders, but basically the pickup on orders has to be fairly substantial to get you to flat revenues for the segment for the year. How much uncertainty is there about the order pickup? Or do you actually have enough visibility at this point to feel comfortable with this forecast?

Well, number one, let's speak to our retail refrigeration, Hill PHOENIX and Anthony. I would tell you that our customers recognize that our lead times over the last, I would say six months, maybe nine months are significantly shorter than what we dealt with in, I think it was in 2016 and in the first half of 2017 as we were making so many changes in the factories. So it's the short-cycle nature of this business is very well recognized by our customers today. We have very strong input from customers with respect to anticipated spending in the second half and the new awards that I referenced or hinted to earlier, those are not yet, I mean we're not waiting for those to be signed; they have been awarded.

Hey, guys, good morning, congrats as well. Congratulations to Mr. Livingston. So just on refrigeration, the book-to-bill was good but not perhaps as strong as it's been historically in the first quarter because obviously this is a very seasonal business with 2Q and 3Q stronger than 1Q and 4Q. Should we expect, you mentioned back half deliveries, should we expect a bit of a sub-seasonal performance in 2Q before maybe being a bit better seasonally in Q3 and 4Q? How should we just think about all bases in 1Q?

Yes, I think you will see this year that the third quarter is a much stronger seasonal third quarter relative to the other three quarters of the year than we have historically shown. If you look back in history, in many years the second quarter has been the strongest quarter, with the third quarter being strong but typically trailing a little bit behind the second quarter. I mean we see that being a different issue. We see in the third quarter, June through September being the strongest shipment period for this business in 2018. And right now we do expect the fourth quarter to show organic growth for the retail refrigeration part of the business. And again, I'm going to reference the new awards that have been booked recently.

Right, okay. And as far as the margin guidance for that segment, I'm not sure you've given that specifically but maybe just some color on how you would expect for the year to play out for Refrigeration?

Well, I can't; I don't have it by quarter, Steve.

No, no, just for the year, just color for the year.

I think we're seeing 100 basis points of margin improvement for the year.

Thanks and congratulations Bob. So maybe touching on Steve's question there for a second on just refrigeration. So I want to make sure that I've got this right. The bookings this quarter were down a lot but it sounds like the awards have been booked, so just like we are expecting this year?

No, no, I referenced two new customer wins. We have those contracts in-house. But we don't have the releases yet on when they actually want the product shipped, but we do know there will be shipments in the second half of the year.

So the awards will then be booked in your backlog sometime in 2Q or 3Q?

I would expect some of that to be flowing into Q2 and the balance of it in Q3, yes.

Got it. That's good clarification. And then I may have missed the last comment you made on a 100 basis points on margin expansion. Are you guys talking about refrigeration specifically?

The segment.

Okay. And that's start to pick up from an operating perspective in 2Q?

In Q2.

Yes, good morning and Bob congratulations on your retirement and thanks for the hard work over the years. Just one question given all the macro concerns just wanted to drill down into one of the businesses, specifically on printing and IT. Could you provide more detail by geography and end-markets both on sales and what are you seeing on orders? Are you seeing signs of a slowdown in any specific market or any specific geography?

Okay. I don't have the detail with me; the geographic detail for printing and IT, though I do know in the first quarter that order rates were extremely balanced around the globe. There was nothing unusual in growth rates on order activity in the first quarter that would raise any concerns, but I don't have the specific numbers. And order activity, the answer is no. We have seen no sign; no evidence in our order book would actually speak just the opposite of your question that the order activity built through the quarter. And we are booking at a fairly solid rate for 2018, especially at Markem-Imaje with another double-digit growth rate in our digital print business.

Thanks Bob, before we take questions, I just want to remind everybody that if you can limit yourself to one question with a follow-up, we'll be better able to handle the 18 analysts that are in queue right now. So with that, Jennifer, let's take the first question.

Hey, guys. Good morning, everyone. Thanks for taking the question. I will also conclude by echoing the congrats to Bob. Good luck. Just a few follow-ups at this point, on the inefficiencies in retail fueling. Can you say how much that cost you in the quarter? And was that also a revenue headwind because you couldn't ship?

It was a slight revenue headwind. I don't want to make a big deal out of the additional revenue; it may have been $5 million, $6 million, or $7 million. It wasn't a game changer. It did cause us to incur some additional costs on express freight and some overtime.

Got it. And following up on something Brad said earlier about feeling particularly good about the Food Equipment business those lines up well with Middleby. I know that's been kind of challenging for a little while. Is that - do you think that end market there is finally starting to show some traction?

I would say it's spotty. I think with some customers - we see some customers buying more than they were last year; but I would say it's not broad based. We're actually looking at growth within this part of the business for the year. But it's all around special projects and special orders. And I would also tell you they are all on the books. We have the orders in house. But we see a fairly good growth rate in this part of the business in the second half of the year.

Got it. Just one last kind of big picture question. Are you guys hearing anything from customers about using past savings or new depreciation rules to step up investments at this point?

We keep asking that question internally as well. And it's difficult. It's difficult to pin down any orders to the taxable changes.

Yes. So this concludes our conference call. With that, we thank you for your continued interest in Dover. And we look forward to speaking with you again next quarter. Thanks again for your interest. Bye.