Dover Corp (DOV) — Q2 2018 Earnings Call Transcript

Thank you, Crystal. Good morning and welcome to Dover's second quarter earnings call. With me today are Rich Tobin and Brad Cerepak. Today's call will begin with comments from Rich and Brad on Dover's second quarter operating and financial performance, and some comments on our 2018 outlook. 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 is providing non-GAAP measures including EPS results and EPS guidance that exclude after-tax related amortization. Reconciliations between GAAP and adjusted measures reflecting adjustments for aforementioned acquisition-related amortization, rightsizing costs and other costs are included in our investor supplement and presentation materials. 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 August 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 3666317. Before we get started today, 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 Rich.

Thanks, Paul. Good morning, everybody, and thanks for joining us for this morning's conference call, let's get started. In Q2, Dover posted consolidated revenue up 3% with adjusted earnings of $200 million and adjusted diluted EPS of $1.30 a share, up 19% and 21% respectively. Bookings remained solid at $1.9 billion at the end of the quarter and are broad-based across the portfolio, excluding retail refrigeration. The Apergy spin-off was completed at the beginning of the quarter, and as a result, we have executed a good portion of the announced share repurchase program, which Brad will take you through, and the impact on the share count later in the deck. We are tightening the full-year EPS guidance range to $4.75 to $4.85 a share despite the full-year demand environment and retail refrigeration being below our original forecast and largely as a result of improved margin conversion in the Fluids segment expected in Q4, tight corporate cost controls, and share count reduction. As we have noted in the press release this morning, we will be implementing a cost reduction program beginning in Q3, which is not reflected in our current full-year EPS guidance and will be subject to a separate announcement I will deal with that, I think, in the Q&A. So let's go on in the presentation, let me pass it off to Brad.

Thanks, Rich. Good morning, everyone. Let's start on Page 4 of the presentation deck. As mentioned, our results were largely driven by solid demand in Engineered Systems and Fluids. Overall revenue grew 3% to $1.8 billion. Adjusted segment EBIT improved to $276 million and adjusted margin was essentially flat at 15.3%. This performance reflected solid conversion in Engineered Systems, which was offset by continued footprint consolidation, supply chain issues in Fluids, and lower volume in Refrigeration & Food Equipment. Adjusted segment EBITDA was $343 million. Adjusted earnings increased 19% to $200 million. And adjusted EPS was $1.30. The EPS benefited from a slightly lower tax rate on discrete tax benefits, whereas the full-year effective tax rate is expected to be between 21% and 22%. On Slide 5, let's get into a little bit more detail on our revenue and bookings results in the quarter. Second quarter revenue growth of 3% was comprised of 3% organic growth and 2% from FX. Partially offsetting these results was a 2% impact from net dispositions. Importantly, on a sequential basis, organic growth accelerated from 1.7% in Q1 to 3.5% in Q2. FX, which was a tailwind of about 4% in Q1, decelerated into Q2 to about 2% as a result of the U.S. dollar appreciating against our other trading currencies. We are using a U.S. dollar Euro assumption of $1.17 in our current full-year forecast.

From a segment perspective, Engineered Systems grew $39 million organically and Fluids grew $44 million. Weak retail refrigeration markets drove a $24 million decline in Refrigeration & Food Equipment revenue. Booking increased 6% overall. Organic growth was 6%. Of note: Engineered Systems and Fluids organic bookings grew $62 million and $80 million respectively, reflecting broad-based market demand. From a geographic perspective, the U.S., our largest market, grew 2% organically, while Europe was up 1%, Asia grew 19%, largely driven by strong activity in our Fluids segment. Finally, book-to-bill finished at 1.05. Let's go to the earnings bridge now on Slide 6. Starting on the top, Engineered Systems adjusted segment EBIT improved $15 million, largely driven by solid conversion on broad-based revenue growth. Fluids EBIT growth of $7 million reflects weak conversion due to footprint consolidation and supply chain issues. The $15 million decline at Refrigeration & Food Equipment reflected lower volume. Going to the bottom of the chart, adjusted earnings improved $32 million or 19%, higher segment earnings, lower interest, and corporate costs, and a lower tax rate drove the improvement. Let's look at Slide 7. Our first half free cash flow was $79 million or 28% of earnings from continuing ops. Second quarter free cash flow was largely in line with last year. Our CapEx spending was focused on multiple projects which will help drive growth and productivity. Working capital increased $59 million on volume growth, although working capital as a percent of revenue came down 130 basis points to 16% of revenue.

Now on Slide 8. As previously mentioned, during the second quarter we initiated an accelerated repurchase program funded by the $700 million Apergy dividend. Beyond the completion of the ASR, we expect to repurchase $150 million more in shares in the second half on the open market. By year-end, we will substantially complete the $1 billion repurchase we committed to last year. And as you know, the ending full-year 2018 weighted average drops further into 2019 on these 2018 repurchases. With that, let me turn it back over to Rich.

Thanks, Brad. Let's move on to the segment slides. Engineered Systems delivered a solid, broad-based quarter. Margin conversion organic revenue was very good at 46% in the period, a result of the following: In printing and identification, the positive comparable performance was driven by volume growth in Markem-Imaje and improved product mix in digital print as a result of the timing of LaRio printer deliveries which should have been expected in Q3 but delivered in Q2. In the Industrial platform, performance was more mixed as they are subjected to material cost and tariff issues. ESG and TWG both delivered very strong performances as a result of the continued demand strength in fleet renewal in ESG and recovery vehicle accessories demand in TWG, with volume leverage and mix more than offsetting input cost headwinds in both businesses. DESTACO and MPG delivered good results on volume and improved mix on the back of automation demand and an uptick in military spending. While VSG reported absolute profits up for the quarter, incremental margins were lower than expected as volume leverage and pricing were unable to cover input cost increases as a result of the delays in pricing and implementation which is being enacted going into H2. Full-year outlook for Engineered Systems is expected to remain strong with earnings levered towards Q4 as a result of industrial facility maintenance shutdowns primarily in Europe in Q3 and the timing of digital print large printer shipments pulled into Q2. Okay, let’s go forward to Fluids. The Fluids segment posted organic revenue growth of 7% during the quarter, with all operating companies growing revenue from comparable periods, especially improved performances in our pumps, process solutions, and transport businesses. Consolidated margin performance for the segment was underwhelming as a result of the execution issues in fueling and transport specifically in DFS partially offsetting strong performances in the balance of the segment. Let me comment on some of the strong results in the segment because it's a little bit of a tale of two worlds here. In pumps and process solutions, PSG colder hydro and to a lesser extent MAG all delivered top-line and bottom line conversion in the quarter. PSG's June shipment rate was the highest in three years, which is a positive sign that our CapEx levered businesses continue to gain strength. The colder business has had a strong start to the year, which continued through Q2. This is becoming a business of significant attraction in the segments portfolio and one that is earmarked for capacity expansion. Results in fueling and transport were mixed. OPW was the fastest growing business at 23%, largely driven by regulatory related spending in China and U.S. below ground products. Margin conversion could have been better as a result of facility consolidation costs, which we consider transitory and beneficial to margins going forward and a geographic mix of revenue with APAC revenue being dilutive to consolidated margins. The expectation is that OPW will have a solid second half as end market demand remains firm. DFS, while posting top-line growth of 3%, posted negative earnings conversion as a result of the continued operational costs associated with the European footprint consolidation, significant supply chain costs and expediting fees, and discrete items in the quarter. Our expectation is that a significant portion of these issues will be behind us by the end of Q3 and that the second half performance will be materially improved going into Q4. What I can tell you is that during the quarter we did have operational issues and discrete items that cost us approximately $7 million of earnings, and if I add that back to our margins, there still remains much to do to get margins on track in this business. The encouraging news is that we're confident it's not a product issue from the performance perspective as product benchmarking and customer feedback is positive. And it's clear that our operational execution has to improve, and we have to establish and execute clear paths for profit improvement plans in Europe and APAC, which are underway. Let's move on to Refrigeration & Food Equipment. Refrigeration & Food Equipment had another tough quarter in Q2 as revenue was down 6%, primarily driven by reduced demand trends, especially in Dover Food Retail and calendarization of shipments out of food equipment, particularly at Belvac, which are back-end loaded in 2018 to Q4. We have updated our full-year forecast for this segment and aligned it with the current backlog and demand trends. EBITDA margin in the quarter declined over 200 basis points or $15 million on reduced earnings in Dover Food Retail, $14 million in Belvac and $4 million on a comparable basis. Our expectations are that full-year demand will remain weak in Dover Food Retail through the balance of the year but for comparable segment margin declines to narrow in Q3 and reverse in Q4 as a result of improving shipment mix in United Brands through H2, Belvac, and Belvac shipments in Q4 and the flow-through of cost actions in Dover Food Retail which has reduced its year-over-year headcount by 18% through June. Moving on to Slide 14, as I mentioned earlier in the presentation, we've updated our full-year revenue outlook to reflect softer than forecasted demand conditions in Retail Refrigeration and tightened our range on the EPS to the higher end of the range with a bias towards the top end. Our revenue trends and backlogs indicate we have strong businesses that are largely participating in markets with increased demand profiles. It is clear that we need to execute on better margin conversion in some areas of our portfolio and to aggressively implement actions to offset raw material and input inflation. During the last 90 days, I have visited approximately 70% of our total company revenue and our management teams in the quarter. The commitment to deliver improved performances is there, and we are committed to implementing the necessary actions to achieve it. That's the last slide, so we will move on to Q&A.

Thanks. Crystal, if we can have the first question.

Hi, good morning. Welcome to Richard and thank you for the candid tone. In terms of any extra color you could provide on the cost reduction measures that you've talked about in terms of magnitude and perhaps also speed of execution and how quickly investors should expect to see a meaningful payback on those cost reduction efforts.

We’re well through our plans. I expect that our plans will be complete by mid-August. From there, we will work on the accounting treatment quite frankly because there are some issues we have to deal with, war notices, and a variety of other things. Before the end of Q3, we'll be announcing the timing of those measures, the cost of those measures, and the flow-through on our cost going into 2019 as a separate announcement. But I guess in a nutshell, we're well under way at this point. I'm confident in our ability to execute.

Understood, thank you. And my second and last question would just be around the Refrigeration & Food business, and I guess you’ve obviously done a lot of cost measures already at food retail. It seems like you’ve obviously decided to keep the business in light of the reviews you've done in recent months, maybe talk a little bit about your impressions on the longer-term sales growth outlook in Refrigeration & Food overall and how that informs the scale of necessary cost reduction?

The cost reduction initiatives are solely in retail refrigeration because that really is the part of the portfolio that's suffering the revenue decline. I think from an earnings point of view both UB, UB is on track for the full-year. I think that we've got some calendarization differences running through the P&L right now in Belvac. So if you look at the segment performance, it's negative to a certain extent because of Belvac, our backlog in Belvac is impressive right now, it's purely a question of the timing of the deliveries. Right now they're loaded into Q4 and that's why in my commentary, I said that the comparable performance for the segment actually rolls over in Q4 where we expected to be positive, which is largely as a result of the cost takeout in retail refrigeration and the shipments in Belvac. So in terms of the portfolio review and the decision about keeping anything, I mean we've gone through the portfolio review in terms of what we can expect about medium-term performance, but there's been no real decisions about a greater portfolio decision at this point. I think that I understand that there is this issue of well why don't we spin out refrigeration or monetize refrigeration, monetizing the business at its current demand levels, I'm not so sure about that from a decision point of view. So I think what we're doing right now is rightsizing that business in terms of what we believe the demand is going to be for the balance of the year. We'll have a better idea as we go through Q3 of what we expect to happen in 2019, and we're committed to making sure that we maximize the segment profitability for that period. In terms of what we're going to do from a portfolio point of view, I think that's a future consideration.

Good morning Rich. Good morning, Paul. It's been a long time; good morning Brad, long time I didn’t see you.

Good morning.

Yes, long time Andrew.

So the question is I guess for Rich as you move from the board to the CEO position, I know you sort of highlighted SG&A moves; are there any obvious things other than SG&A in terms of how the company runs that you have seen as a target for improvement? And the second part of my question, how long would it take for you to think to sort of steady the operation that Dover moves them in the direction where you want for you can sort of restart thinking about using the balance sheets strategically, i.e., M&A?

Okay, I think there's two primary issues. One is clearly that the expectation of demand in retail refrigeration of what we thought it was going to be at the beginning of the year and what it's likely turning out to be for 2018 is significantly different and that goes through 2019. So I believe that we're reaching the bottom from what I can ascertain so far but right now we're moving as quickly as we can to intervene on the cost space to protect margins as they are. We'll make further decisions based on as I mentioned in the previous question about where as we stack up on, we're taking a lot of costs out right now, we’re incurring those costs of the P&L of what kind of on the run margin profile is for retail refrigeration but a variety of demand scenarios into 2019. But clearly that's a significant difference between what we had thought at the beginning of the year and what it's turned out to be, so it's up to us to action that. And quite frankly, segment management has been doing a lot of heavy lifting, so I can't criticize the execution of the cost takeout year-to-date. The other issue is the execution on the facility consolidation in DFS and the margin profile of that portion of the Fluids segment has been disappointing. This has been ongoing for some period of time. I think it has demonstrated that there are some gaps in the organization about handling facility consolidation and complex industrial moves and we're paying the price for that. So right now in terms of margin dilution and accretion, we've got a significant portion of the Fluid segment that is very dilutive to the balance of the portfolio and that's a problem. We're getting our hands around the on-the-run profitability for that segment, if I can strip out some of the noise. But we're not moving fast enough in my mind in terms of the execution. I think that we will make some progress in Q3, so comparable earnings trajectory versus the first half move up in H2 but we're still far away from expectation in terms of the margin of that business and it's significant to our revenue stream, so it's something that we need to fix and I think that that is going to undertake us bringing in a mix of some other kind of talents into the group to ensure that because there are other footprint initiatives that I think will be coming through 2019 and we just got to do a better job of executing there. In terms of inorganic investment, this is not a scenario of while we're going to go through a cleanup period here and then we're going to come out on the other side. We're still looking at inorganic opportunities and the balance of the portfolio. We've got certain portions of our business that are executing very well; I mean I highlighted some of them in the opening commentary. We're looking at a few right now and the scale in terms of purchase price is somewhere, it’s less than $0.5 billion but more in the $250 million range.

Thank you. Good morning. Hey Rich thanks for all the color on kind of the operational and CEO kind of new view just on maybe some of the more kind of practical near-term operational things, can you just give us a little color on really what the supply chain disruptions are, how do you tackle those and also just a little bit of an update on what is happening on price cost in particular your efforts to get price in the business?

Sure. For the most part, the supply chain issues that we've had that have been negative to earnings have been mostly isolated in Fluids and almost exclusively in DFS, and that is part and parcel to this facility consolidation to a certain extent and trying to manage our SNL pieces systems of getting the right product out. So we've had a bunch of frictional costs associated, whether that's freight expediting. On the balance of the group, it's being reflected in working capital performance where I think that the supply chains in certain parts of the business have been somewhat strained. I think in certain areas we've tried to buy forward a little bit on the industrial businesses for steel to kind of mask price increases to a certain extent and that really needs to be normalized going into the second half, because we're not entirely pleased with the cash flow performance year-to-date. So those are really the two areas where it's manifesting itself.

And how about on price attempts specifically Rich, how is the market accepting that, is there kind of negative demand response when attempting to get price or any blowback anywhere on that?

We have a diverse portfolio, so my response will reflect that complexity. We estimate that our commodity headwind is around $55 million, which needs to be countered by pricing. In particular, I've mentioned VSG, which has faced some challenges due to its distribution nature, and we are committed to addressing that in the second half of the year. Other segments like TWG and ESG, which are closely tied to commodity prices, are performing reasonably well in terms of pricing and are balancing out the situation due to volume leverage on the industrial side.

Thanks for the abbreviated script and a lot of time for Q&A. We appreciate that. On the free cash flow, you mentioned you just mentioned some working capital. I know the prior guidance was 10% of revenue, well, I know you have a big second half usually can you maybe just update us on that metric for the year and then maybe give a little color on how that may improve in the next couple of years and just a quick follow-up on that?

I will focus on the period until the end of the year rather than the next couple of years for now. I can address that in Q3. Currently, I'm not seeing any changes in the business dynamics or cash flow. Therefore, I'm not reducing our revenue target by 10%. As discussed during the Q3 commentary, our businesses are backend loaded, which suggests that receivable balances in Q4 might increase. We will need to manage industrial inventory and payables effectively to balance this out. Nevertheless, I don't perceive any significant changes in our inventory levels or cash conversion. It's difficult to predict the quarter-to-quarter timing right now. I've analyzed the operational level, and any fluctuations will depend on the timing of receivable balances. By the end of the year, we're expected to ship several LaRio machines and a significant number of Belvac units, which could have a negative impact unless we can carry over some payables to counteract it. At this point, I see no reason to adjust our 10% revenue target.

Okay. And then just a quick one on RF&E you talked about taking rightsizing actions I don't see really any restructuring in the quarter at refrigeration is that because a lot of the plan that you're going to kind of come up with and announce it's more kind of let's put stop saying let's evaluate and that would be a big part of kind of what we hear about in Q3 like kind of a calm before the storm if you will?

I think the adjustments in refrigeration have impacted variable labor more than expected. We are planning to evaluate our operational footprint since it currently exceeds our needs based on demand levels. While there will be some adjustments related to the footprint, the restructuring announcement in Q3 will primarily focus on reducing group-wide SG&A. It's important to note that decisions regarding the footprint will require more time and preparation for the supply chain, so many of those changes will likely extend into 2019. In the upcoming quarter, we will assess our SG&A across all segments, as our benchmarking shows we are somewhat overextended. We've already implemented systems to eliminate some non-customer-facing costs, and that is our focus moving forward.

Thank you very much, good morning. I appreciate the insights you’ve shared as they are quite helpful across the business. I would like to delve a bit deeper into the operational review you mentioned. You talked about achieving 70% of the revenue base, as well as issues related to SG&A and the supply chain. To what extent do you see a broader opportunity for operational and lean improvements when evaluating how the businesses are functioning? Do you view these as isolated incidents, or is there a chance to rethink the operations of the business on a portfolio level?

Yes, I think that right now we are concentrating on the actionable items, so SG&A clearly is an actionable, addressable item and as we have mentioned we've got some pretty big execution issues that we need to deal with in DFS. DFS has a material portion of our total group revenues, and clearly we're kind of swimming upstream a little bit on retail refrigeration until that business stabilizes itself, so there is a lot we can do in terms of operational performance. That it's going to require that's but that is more of a sustained kind of grinded out effort. So I mean it's not something that we can turn the dial between now and the end of the year. I think other than just begin to turn it philosophically. But in my going around I think that we do need to bring into some of our businesses some expertise in terms of operational efficiency. I think we do a fantastic job of keeping close to the customer. I think we do a really good job in terms of new product development, so kind of close to the customer and developing the products which is reflected in our top-line which has been very competitive against our peer set. I think that part of it we do quite well, I think that we just need to take that kind of effort and turn some of it back in terms of operational execution. But that is something that is we can put it in it as an ethos between now and the end of the year but we're going to have to grind that out and that's more of an 18 months before we really get on a cadence that I'd like to see out.

Okay. And just to clarify on the comment this morning when you talk about asset intensity, you mean driving higher asset utilization across the business?

Yes, absolutely, absolutely. I won't use intensity again; we're not going to become more asset heavy. We are going to sweat the assets that we have more intensely. Somewhere in this pile here is the chart where do we say we were on EMV penetration 40%?

Yes, it's approximately 40%, though it's difficult to determine exactly because we are experiencing an increase in new dispensers. Many customers are reviewing the age of their current dispensers and are choosing to upgrade earlier than they typically would, resulting in higher order rates for dispensers. As you are aware, the first half of the year was challenging since last year's EMV results were quite strong in terms of kits and conversions. Moving into the second half, we anticipate seeing a greater focus on dispensers. Generally speaking, the figure Rich mentioned aligns with our expectations, and we believe there is significant potential for growth in the latter half of 2019.

Thank you. Good morning everyone and welcome Rich.

Thanks.

Hey, maybe we can start with what you're thinking and I know it's a moving target regarding potential tariff exposures and you mentioned $55 million in commodity headwinds you need to offset but any color there for starters would be helpful?

The $55 million figure is a combination that includes tariff impacts and price increases, and breaking that down will be important.

It's small.

Yes, parsing that out is relatively difficult. We are keeping a close look at our exposure to China in terms of our revenue base, clearly and not only our exposure from a revenue point of view but also the mismatch between what we make in China and selling to China versus what we import and export. So we're running the traps on all of that; it looks manageable at this point, so I don't see any significant issue. I'd like to see our Asia-Pac margins move up group wide a little bit but I’d mention that in the color around LPW but at the end of the day from an absolute profit point of view, we will take it. So we're running the traps on both kind of tariff scenarios but for us right now, it's less tariff and more commodity cost headwinds and then it's just a challenge for us to offset it between price and productivity.

Got it. And then Rich, I appreciate that we're still early in your tenure and you're laying out some broad strokes on the operating side and what needs fixing, but can you address capital allocation broadly? You mentioned that you're not going to stop on acquisitions. You're looking at $250 million to $500 million-sized deals. But broadly, how are you thinking about return requirements? Are there any changes that we should be sensitive to in terms of how you're looking at capital allocation broadly?

Right. We're looking closely at it. I'm very cognizant that everyone is looking for a structured answer from me on that, our intent is hopefully before the end of Q3 around the close of Q3 that we're going to come out and I'll give you a whole presentation in terms of my thoughts on capital allocation in the short-term. Brad alluded to what we're doing in terms of the share repurchase as, a) it was a commitment in the past but it's a relative valuation play at the same time, so I think we've given you a lot of color in terms of our intent there. But I understand that everybody is waiting to hear from me about capital allocation and I'm working on the presentation as we speak.

When examining refrigeration, I realize there have been several inquiries, and it has been a challenging couple of years. In this quarter, Bob previously mentioned the arrival of new customers and increased bookings. What’s the current status of the business? The CapEx environment is clearly weak, yet Bob spoke about growth in specialty stores. It feels like this situation is constantly changing. Considering our current guidance, do you believe it’s still quite conservative, Rich?

I hope it's conservative. We may be referring to retail refrigeration. Looking at this segment, it’s likely to face challenges in Q3, and the situation should improve in Q4 as the comparisons become more favorable. The non-retail refrigeration aspect of our portfolio is currently back-end loaded in our projections, so we anticipate an uptick there. However, we have not seen significant changes; food retail is experiencing a bit of a CapEx pullback as they navigate digitization. Currently, demand is below replacement levels. I don’t expect conditions to worsen, but I don’t foresee a significant improvement either, except that at some point, maintenance and replacement capital will need to be addressed. The ratio of new builds to replacements has fundamentally shifted, and we will need to adjust accordingly. Regarding other revenue streams, we are actively seeking to diversify our offerings beyond just case and door products within food retail. We have some promising opportunities in this area, but they won't affect our earnings in 2018. If we can provide more details, we will communicate that, but for the medium term, we’re focused on rightsizing and maintaining our quality, aiming to improve comparable profits even with flat revenues through cost reduction, while also working to diversify our product revenue streams. Yes, I understand that there is a desire for me to clarify the 2019 targets. From my analysis, both Engineering Systems is primarily on track regarding top-line growth and margin improvement. However, Fluids is facing challenges due to the negative conversion in DFS, which has been further complicated by our previous discussions on food retail. I tend to focus on consolidated margins; this is a portfolio where demand will fluctuate, but if I assess it collectively, part of our strategy to address the overhead costs is to bridge the gap created by our execution issues in DFS, along with the challenges we face in refrigeration.

Just on a bigger picture you talked about particularly in refrigeration and I guess more fluids bringing some more talent on the operational execution issue, do you think as you and I know it's a little bit far to 2019 but these type of things generally take a bit more time you've got to bring people and you've got to get the plan in place and you've got to execute. I mean as we look from a margin perspective particularly on that DFS business and more into refrigeration do you see kind of going through 2019 before you and exiting 2019 before you see any real meaningful margin improvement there or should we expect it sooner than that timeframe trying to get a framework of how long do we see sort of some of these subpar margins in parts of the business before they start getting really better on the plan you're going to put in place?

As I mentioned earlier, from an execution perspective regarding refrigeration and the cost actions taken, I believe the plans are established for the comparable margin to improve. The primary factor is demand, making it a top-line concern. The segment management is addressing cost aspects well; there are no execution issues in retail refrigeration. However, there is a significant top-line challenge, which complicates fixed cost absorption. So far, the team has managed variable costs through the profit and loss statements on a comparable basis, even with flat revenue, to prepare for growth heading into 2019. And then it's clear that we're probably going to have to take some action in terms of the fixed cost in that business to right size it based on future demand. We're not there yet because I think we need to see some stabilization in terms of the demand profile on that portion of the business. On DFS I can tell you that if I clear out of the noise of the facility consolidation and everything else, it's a material amount of earnings increase at flat revenue. But I'll also tell you that the profit margin even if I clear out the noise is unacceptable from a comp base. And that is likely to take, I think we will make improvement. I think you're going to see some improvements in the second half of this year, largely in Q4. I think that you'll see improvement assuming we clear out the noise which we're committed to doing in 2019, but it's going to likely take throughout 2019 to materially get this closer to benchmark profitability which is our target.

Understood thanks and just one more quick one on, you talked about one of the things you think you guys are pretty good at are new product development that doesn’t seem to be an issue but I’m wondering if you look across the portfolio, are there areas where things may have been under-invested in terms of new product development and that's an area that need a little more focus or is that kind of squared up across the board?

It’s such a mixed bag, I think it's very difficult to answer. I think by and large, as I mentioned beforehand, the customer-facing portion of the business is executing. So, and that includes new product development, right? A lot of what we do is I would almost classify as co-engineering in a lot of cases. I think from an investment point of view, if there's been any opportunity in terms of investment it would be at the industrial level and that's a productivity issue, right? So there may be some amount of flex of investing in the industrial footprint to derive future productivity out of it and be less labor-intensive in some of our more industrial businesses.

Yes, good morning and welcome Rich. If I may, I’d like to maybe ask you kind of a longer-term question if you're looking out three to four years, I mean I certainly understand what you're trying to do from a cost reduction in restructuring standpoint in the near-term, but what is your sense on where the biggest opportunity for value creation would be in the company, is it on self-help driving margins or is it more along the capital deployment portfolio management side?

In the near-term, our focus is on self-help, while in the longer-term, we will shift towards investments where we see advantages from the market structure. We believe we have a competitive edge. Therefore, over the next 18 months, the emphasis will be on operational execution and self-help. I have identified areas where significant changes can occur. However, if we successfully execute on these plans, it will eventually shift to capital allocation, directing our resources where we see a structural advantage, whether in market structure, product, or other factors. This doesn't mean we are entering a phase where we only focus on execution issues; we can manage both aspects simultaneously.

Rich, it sounds just maybe just asking the margin longer-term margin guidance question directly, it sounds like we've talked a little bit about bridging the gap to what the old targets were for 2019, when do you think you're going to be in a position to either affirm or provide new margin guidance on a longer-term basis?

No, I think that what I alluded to before about coming out and doing, let’s call it a Capital Markets Day for lack of better words about presenting something about capital allocation clearly as part of that it's going to be something about what we think about future margin performance is going to be. I just need some time to get it all sorted and I think it's important that we have a definitive answer in terms of the costs and the role forward about the actions that we’re going to be taking in the next 90 days as part of that presentation.

So we've seen, in the past, facility consolidation issues. We've seen supply chain issues. These are, unfortunately, not new things. So what I'm wondering here is, as we look to slim down improved processes, what is the risk that 2019 becomes one of those infamous transition years for you guys?

I don’t want it to be my transition. So I think the commitment of clearly from an execution point of view in DFS, I can't speak to the past. I can just speak to what we're dealing with right now; I think that we could have handled this better, right? I think that I'll put it in my lap; I know how to do that stuff. So I think that it's just a question of doing the preparation beforehand and executing on the plan. And just so I think also as I mentioned that we are going to be taking the industrial footprint but over the course of the next 18 months. And we may have targeted actions there but what I can assure you is that when we take those actions that will tell you upfront what the cost is going to be and what the timeline of the execution is and it's not going to be modeled in kind of on-the-run results.

So it's entirely possible that, let's say, for example, the first half of next year could be a little, for lack of a better term, squishy off of what you're trying to do over the next 2018?

I'd like to say it's possible. I don't think so, I guess is my answer. Right? If it’s squishy, let's take an example. If we want to intervene in 2019 on the industrial footprint of retail refrigeration, for example, it would be squishy to the extent of there are some amount of redundant costs both in preparation for and working capital to prepare to make that transition. All right? But those are relatively known and easily measured, right as opposed to having difficulty with the transition and not starting up appropriately where you're basically having difficulty executing on your backlog and then you get all of the frictional costs associated with that, whether that is redundant labor significant overtime, freight expediting, paying supplier premiums, that part of it is execution, and that's the part that while we may intervene on the industrial footprint, I think that the planning of that and our ability to demonstrate this is what it's going to cost and this is what the timeline, that part we'll fix.

Thank you. That concludes our Q&A session for the day. I would now like to turn the call back to Mr. Goldberg for closing remarks. Thank you. This concludes our conference call. With that, we want to thank you for your continued interest in Dover and look forward to speaking to you again next quarter. Have a good day, thanks.