Dover Corp (DOV) — Q3 2018 Earnings Call Transcript

Thank you, Laurie. Good morning and welcome to Dover's third quarter earnings call. Today's call will begin with comments from Rich and Brad on Dover's third 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 adjusted EPS results and 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 easier comparability with peer companies. Reconciliations between GAAP and adjusted measures reflecting adjustments for aforementioned acquisition-related amortization, rightsizing 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 November 08 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 1598024. And 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. We also 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.

Thank you, Paul. Good morning, everybody. Thanks for joining us on this morning's conference call, let's get started on Slide 3. Organic revenue was up 3% for the quarter as solid demand trends in Engineered Systems and Fluids more than offset the continued weak demand environment in Refrigeration and Food Equipment. Adjusted Q3 earnings of $203 million and adjusted earnings per share were up 9% and 14% respectively. Bookings remained solid at $1.7 billion at the end of the quarter and are broad-based across the portfolio, excluding Refrigeration. Overall the quarter was largely in line with our internal forecast and our earnings comments at the end of Q2. We expected a slower Q3 relative to the previous quarter in Engineered Systems as a result of demand colonization and scheduled production shutdowns at our European operations. Despite this, Engineered Systems margin conversion was strong at 47%. Fluids performed as expected with solid results in Pumps and Process Solutions buffering the residual footprint costs in fueling and transport. Refrigeration & Food Equipment proved to be tougher than expected in the quarter and we've incorporated current conditions into our full-year guidance. Our fourth quarter is shaping up to be driven by improved margin conversion in our Fluids segment as we get our operational issues behind us, coupled with the flow-through of our cost initiatives more than offsetting the negative impact of the Refrigeration and Food Equipment business and the higher tax rate projected for the quarter. We have significantly completed our SG&A rightsizing plans during the quarter, which we will address in the presentation, and we're moving forward with our footprint rationalization activities, which we expect to begin executing in Q4. As a result of the above, we have further tightened the top end of the range of our EPS guidance to $4.80 to $4.85 per share. I'll pass it to Brad here and come back during the segment slides. Brad?

Thanks, Rich. Good morning, everyone. Let's turn to Slide 4. As mentioned, our results were largely driven by solid demand in Engineered Systems and Fluids. Adjusted segment EBIT was essentially unchanged at $274 million and adjusted margin was 15.7%. This performance reflected strong conversion in engineered systems and improved performance in fluids, largely offset by lower volume in Refrigeration and Food Equipment. Adjusted segment EBITDA was $341 million. Adjusted earnings were $203 million and adjusted EPS was $1.36. EPS benefited in the quarter from a lower tax rate on discrete tax benefits. The full-year effective rate is now expected to be between 20% and 21%. Moving on to Slide 5, let's get into a little bit more detail on our revenue and bookings results in the quarter. Third quarter revenue of $1.7 billion was comprised of 3% organic growth, offset by a 3% impact from dispositions net of acquisitions. FX was minimal in the quarter. Organic growth remained above 3% in Q3, despite headwinds in Refrigeration and Food Equipment. FX, which was a tailwind of 2.2% in Q2, decelerated into Q3, resulting in a small headwind of 0.5%. We are using a US dollar-euro assumption of $1.17 in our current forecast. From a segment perspective, Engineered Systems grew $35 million organically and Fluids grew $58 million on broad-based activity. Weak retail refrigeration markets and delayed shipments and can-shaping equipment drove a $39 million decline in Refrigeration and Food Equipment's revenue. Bookings increased 3% overall. Organic growth was 6%. Of note, Engineered Systems and Fluids' organic bookings grew $38 million and $77 million respectively, reflecting broad-based market demand. From a geographic perspective, the U.S., our largest market was flat organically, where broad-based growth in Engineered Systems and Fluids was offset by Retail Refrigeration. Europe was up 2% organically and Asia grew 23%, largely driven by strong activity in our Fluid segment. Finally, book-to-bill finished at 0.98%. Let's take a look at the earnings bridges on Slide 6. Starting on the top, engineered adjusted segment EBITDA improved $8 million, largely driven by solid conversion on broad-based revenue growth. Fluids' EBITDA growth of $9 million reflects better execution in retail fueling and conversion on volume in our other businesses. The $23 million decline at Refrigeration and Food Equipment reflects lower volume and negative business mix. Going to the bottom of the chart; adjusted earnings improved $16 million or 9%, primarily driven by lower interest and corporate costs and a lower tax rate. Now on Slide 7; our nine-month free cash flow was $284 million or 66% of earnings from continuing operations. Third quarter free cash flow was $206 million, was on track with our expectations and largely in line with last year. We expect the fourth quarter to be our highest free cash flow quarter of the year, which is our normal pattern. Of note, the free cash flow impact of our restructuring initiatives on a year-to-date basis was $39 million, of which $11 million was paid in Q3. In all, we expect to deliver full-year cash flow within the range that we provided at our Investor Day in September. Moving to Slide 8; finally, we completed the open market portion of our $1 billion share repurchase program in the first week of October after repurchasing $148 million in Q3. The $700 million ASR will be finalized by year-end, thus completing the full program. With that, let me turn it back to Rich.

Okay. Thanks, Brad. Let's try to put some color around some of the segment performance in the quarter starting on Slide 10 with Engineered Systems. Engineered Systems had a solid broad-based quarter with seven out of eight operating companies posting improved revenue, driving a topline organic growth of 5%. Margin conversion in the quarter was excellent at 47%, with all operating companies improving profitability quarter-over-quarter. Our printing and identification platform had solid performance in market by margin digital printing, both of which posted topline growth greater than the average of the portfolio at accretive margins to the segment. Market modest growth is broad-based geographically with particular strength in consumables, which is positive to margins. Dover digital printing was driven by large equipment shipments and cost control initiatives, offsetting a competitive price environment. The industrial platform business is all increased comparative profits as our CapEx levered businesses continue to operate in a constructive demand environment. Our ESG business continued to deliver strong absolute profit results despite having a less rich product mix during the quarter and the continued pressure from higher raw material cost pass through. Our vehicle service group delivered its strong margins performance of the year despite its European facilities being down for scheduled maintenance in the quarter. OKI, DESTACO, and TWG continued to benefit from end market CapEx-driven demand and dealer stocking, and microwave products continued to perform in what we believe to be a multiyear constructive environment for military spending. Going into Q4, bookings for Engineered Systems remained solid. We expect the quarter to be a good one, despite some comparable negative product mix in ESG and microwave products and FX headwinds in our businesses that are materially exposed to Europe, predominantly Markem-Imaje, digital printing, and ESG. Next slide. The Fluid segment posted organic growth of 9% for the quarter, with the majority of the portfolio posting comparative topline growth, with particular strength in our fueling and transport businesses. Consolidated margin for the segment was flat, largely as a result of the dilutive impact of fueling systems to segment margin and some transitory footprint issues in our transport business, which should be largely contained in Q3. Our pumps and process solutions businesses all performed well during the quarter. Incremental margin performance in PSG, MAG, and Precision Components were all in excess of 50% in the period, as a result of volume leverage, mix pricing, and cost control initiatives outweighing input cost headwinds and tariff costs on imported components. Colder continued to perform well in the period in both the top and bottom lines due to solid demand in single-use connectors. Fueling and transport had a choppy quarter from a margin conversion point of view, but we are encouraged by our exit margin for the quarter and our forecast for topline and margin conversion leading into Q4. In Q3, DFS posted solid topline growth, and while incremental margin performance was still below expectations, it was improved and leaves us confident that the majority of our footprint consolidation costs are behind us and that we are headed in the right direction in meeting our margin objectives as we outlined in our September presentation. In OPW, while our margin performance was satisfactory, we did have prior period footprint-related costs in the quarter and lost production time at our North Carolina facility due to weather-related issues. Our Q4 forecast for Dover is largely driven by the expected improvement in margin conversion in the Fluid segment, particularly driven by our fueling and transport businesses, improving their operational performance, and the beginning flow-through of our cost control initiatives. I've just returned from our facility in Dundee, Scotland. While there remains much to do, I am confident that our line rates are set to improve throughout the quarter and will benefit from industrial absorption and reduction in frictional costs. Of note, we are assessing the outlook for EMV demand in the U.S. in 2019, and we'll be making some decisions regarding the appropriate level of component stock to be carried into January to support projected demand. Moving on, the Refrigeration and Food Equipment segment had its toughest quarter of the year in Q3, with segment revenue down 12% to $386 million. While we have been expecting another difficult quarter in retail refrigeration, we were caught off guard in our Belvac business, where machine deliveries have increasingly deferred into 2019, negatively impacting our prior forecast for segment margin for the quarter and full year. Our full-year segment forecast now incorporates a more modest decline in demand in Retail Refrigeration as this business begins to bottom out and a push out of machine deliveries from Belvac into 2019, which are significantly accretive to margins in the segment. This negative mix impact will be partially offset by cost control actions undertaken in the year, largely in the Retail Refrigeration business. This earnings miss in Belvac does not add an additional operational challenge to the Group, nor does it change the fundamental value of the business in the portfolio as it is a unique asset capable of delivering high, but inherently lumpy returns. As we presented in September, we've begun in earnest to address our footprint actions in the segment as it is the clearest path to improving margins to the target ranges that we established in the presentation. We expect to begin in Q4 and continue the project through 2019. Let's go on to the next slide, as we noted in the morning's press release, we are progressing as planned in the rightsizing initiative that we announced at our Investor meeting in September. As you see in the slide, we are well on our way to concluding the reduction in force portion of the plan and you can see the reconciliation of the PLL impact for both the restructuring charge and the SG&A cost reduction in Q3 and the projection of the timing of the charges for the balance of the plan. The non-headcount portion of the plan will be almost exclusively weighted towards 2019, and I think that Brad addressed converting these charges into cash. We can deal with the Q4 charges and what we project on that cash impact in the Q&A. Moving on to the next slide is the guidance, which I addressed in the press release in my comments on the segment outlooks to conclude. We enter Q4 with a good order backlog across much of the portfolio, which has weathered the challenges of higher input costs in an uncertain global trade environment during the year. Clearly, there remains much to do to deliver on our full-year guidance, but by acting decisively on our cost structure, we are in a good position to deliver. I've been encouraged by the engagement of our leaders to embrace these changes and I'm looking forward to embarking on the next stage of our initiatives and our objective of delivering best-in-class operating performance. That’s it. Let’s move on to Q&A.

Thanks, Rich. Laurie, before we have our first question, I just like to remind everybody, if you can limit yourself to one question with a follow-up, that will allow us to get more people in the queue. Let's have our first question.

Hey. Good morning, guys.

Good morning.

Rich, during the Analyst Day in September, you noted some signs of pricing stability in Refrigeration and highlighted some new products on the horizon. However, despite the Belvac delays, the margin was lower than expected. Is it still too soon to determine if we've hit the bottom, and can you manage costs effectively in light of these challenges? Will you be able to offset the volume declines as we approach 2019?

I believe we need to divide the response regarding the challenges with Belvac, which are expected to continue into 2019, costing us around $10 million in comparable profits compared to last year's fourth quarter. However, we are not overly concerned about the overall business, as we have a solid backlog. The revenue and returns are quite variable, and the margin on Belvac volumes is high. Therefore, we will need to address this specific challenge through cost control measures. In Retail Refrigeration, while we haven't experienced a positive pricing environment recently, early data suggests that the negative pricing pressure from the first half of the year may be easing. We are not ready to declare that we have hit the bottom, but it appears from the backlog heading into the fourth quarter that the market has started to slow down since the end of last year. Although comparisons will improve, the rate of backlog decline is significantly less than what we observed throughout the year. We are not currently in a position to state we’ve reached the bottom, but the data indicates that the decline has reduced, and pricing pressures have lessened somewhat. As we move forward in our decision-making for next year, our focus will be on determining the size of the market, which will guide our cost management efforts. This is a project that will span the entire year. I don’t anticipate that the situation will worsen significantly going into 2019; however, I don’t have clear indicators suggesting that conditions will improve, apart from the cost reductions we plan to implement throughout the year as we begin making comparisons heading into 2019.

Great and then Rich, maybe you can give us some more color into revenue growth across the company. Obviously, you talked by geography, U.S. is flat. We know it's Refrigeration sort of holding that down. Asia 23%, obviously, there are a lot of concerns out there on the macro side into China and Asia, but it didn’t seem like you guys were seeing it. So maybe talk about the visibility you have in two of the geographic growth as you go Q4 and into 2019?

Look clearly the North American market is the leader in terms of the demand, but in our exposure to Asia overall, it's not overly material, but right now the demand that we’ve seen, particularly in China, has kept up. A lot of that is in the underground portion or the OPW portion of the business right now. North America I think it's a couple different tales at the end of the day. I think the CapEx levered businesses that we have are posting good topline growth. I think if you go through some of the comments that I wrote in the press release about who's clocking double-digit growth, we can go through it again, but our fueling systems is close to 15 for the quarter. So that begs the question of what is going to have to happen to EMV. So I'll leave that to a follow-on question. But overall, GDP in North America is up and it's driving the CapEx end of our businesses. I think the Markem-Imaje is just performing in the sector. So its growth was close to 5% for the quarter. So it’s clocking quite well and that, as I mentioned in the margin conversion in those business has been excellent.

Thanks. That’s good color.

Thanks and good morning all. Hi, just a couple of questions; one, not just because you cheated off. So what was the EMV growth in the quarter? What are you seeing in terms of trajectory there and how are you thinking about that going forward?

EMV grew during the quarter by approximately 5%. We expect that same growth rate to continue into Q4. Our perspective is that US demand driven by EMV, however we define it, will increase next year. While we are not ready to quantify it yet, it will definitely be included in our 2019 guidance. The key decisions we face involve how much inventory delay to prepare for, particularly if there is a significant increase at the start of 2019.

Okay. Good to hear. And then I just want to follow up at Belvac commentary as well, simply because if we go back and listen to their comments from last quarter, at that time it was pushed, and the thought was look it's backend loaded to Q4. The expectation was that it will remain. So specifically, it’s always easy for a lot of companies as they project push out for large projects. Can you give us a little more comfort level that of what's going on here and why it's sort of just one more quarter and we can then put in our own numbers for Q1?

Yeah, look I think that we're pretty transparent. We're caught off guard with this, right. We had the backlog and we're moving into beginning to source and we did source some of the raw materials to actually get into building out some pretty large units. The deliveries have been deferred. Now what does that mean for 2019 is additive. I think it's too early to say, but I think that what we believe is what we had in the pipe. We're going to deliver in 2019, but I mean, look, these are very big machines. So they have big ticket prices on them and they have very high margins on them. So I’m just frustrated as everybody that the fact that they got pushed, but I don't believe that it's something that's changed in terms of the market structure. I don't think that the retail what would it be called, retail food for beverage is rolling over by a stretch of imagination and our customers there are a lot of times retail beverage. Some of the canning makers themselves. So I don't think it's overly worrisome. I just think that the timing of it is poor and the fact that it happened in a sector that we've already had headwinds in makes it doubly poor, but I think it's still a good business, and I would expect that we’ll deliver on that volume that we should have seen in 2019.

I would just add to your comment earlier, we’ll just have more to say about this in January '19, but I would not at this stage think that it's an automatic ship in the first quarter. We'll come back on the timing of that, which is expected to be slightly later than that.

Okay. All right. That's all really helpful. I'll pass it on. Thanks.

Thank you. Good morning all.

Good morning.

Rich, I want to think a little bit more about the puts and takes in a little more detail. The Belvac color is really helpful. If we think about, I guess you got roughly $24 million of restructuring tailwinds in the numbers here in 2018. Should we think kind of the most of the kind of missing upside for lack of a better term is just price cost. Can you give us a little color on price cost in the quarter and what you're dealing with there and any kind of pricing counteraction that you're taking?

I think, as I mentioned in my comments, I think that both the Engineering Systems Group and Fluids Group performed as we expected. I think at the end of Q2, I made some comments that if you looked at the trajectory of earnings in Engineering Systems that you couldn’t just clock that through the balance of the year because of the fact that we knew that Q3 was going to be a little bit light relative to that trajectory. Now having said that, the incremental margin on that revenue is still significant. So it's not by any means a bad performance. It’s just that we expected that to happen to a certain extent. On Fluids, I think the growth rate is still very good, but it's a little bit of the same story that we've had year-to-date in terms of the margin conversion on the DFS portion of the business. It actually exited quite well in the month of September, and that's why in our full-year forecast, a lot of our operating performance, at least our comparable operating performance year-over-year, is going to be driven by Fluids.

And I think I was also curious. I think you said the footprint restructuring is now actually done in fueling. I was thinking that was more of a 2019 exercise. Is that correct?

No, no. What I was saying is that we've been carrying around the cost of the Dundee consolidation. The first piece of the European footprint, which never went into restructuring. We’ve been taking that through the P&L all year. That is largely complete. So that’s where I was last week. Look, we’re getting into the gory details. Line rates are picking up, the absorption is picking up and without getting into monthly margins, I look at our September margins in DFS. They’ve moved up significantly. So it leads us to feel good about the fact that that’s where we have a lot of demand going into Q4. If we can convert on September margins, we’re in pretty good shape.

Great. Thanks for the color.

Thanks. And thanks for the concise nature of the preparatory remarks. My first question I guess is on the free cash flow. I saw the detail on restructuring and so forth, but working capital has been a big drain in the first nine months, $160 million or so of the cash out. So I just wondered how quickly we should expect that to reverse and whether one should expect a much better performance on that next year?

Well, I think that Brad said in his comments that we expect to be within the range that we gave as a percent of revenue in the September presentation. It's clearly going to take some heavy lifting to get there, but we think we are confident we can get inside the range. And in terms of 2019 performance, well, if I take out the restructuring, the cash impact on the restructuring, that's going to depend on our guidance for topline revenue right. So again we are building net working capital, which is pretty much inventory receivables on the back of topline growth. Refrigeration is just not large enough to offset that. So our liquidating inventory on refrigeration side because revenue is coming down, but conversely we've been building inventory on some pretty good growth rates on the balance of our business. We're not clocking at best-in-class cash flow clearly. So there’s a lot of work to be done, but before we start giving '19, I think that I'll put it this way. In '19, we’ll be through in the range that we gave in September. How that dynamic functions is going to be a question of once we call growth rates for 2019.

Thanks. And then just circling back to maybe one more time to RFE, are we right in thinking that this year, the adjusted profit is sort of about $150 million for that business, and then yeah if you do or don’t want to get caught around that maybe related to it, how quickly do you think we start to see footprint consolidation savings next year in that business?

I won't provide an answer regarding the segmental margin expectation, but I did share some insights on the quarter-to-quarter performance. There will be a $10 million negative impact due to Belvac year-over-year, which we will need to offset. The footprint optimization will commence in the fourth quarter, and while it won't be overly significant, the larger positive outcome will come from the substantial reduction in overhead costs we have achieved throughout the year. We have maintained flat revenue and will benefit from the full-year savings going forward. Addressing the larger footprint challenges will take place over the course of 2019, as it involves considerable automation efforts and managing the physical space.

Great. Thank you.

Yes. Good morning. I just have a simple question given that you sort of started our cost cutting in Q3 and Q4 back on September 11, you said $0.53 of net benefit in 2019. Can we assume that everything you have done so far is consistent with that framework?

Yes.

Those numbers remain unchanged. Regarding the timing of the restructuring in Refrigeration Food Equipment and the related footprint changes, it appears there hasn't been significant restructuring in the business. While Belvac was included, should we consider that this restructuring is aligned with the timing of footprint rationalization? Is that the right way to think about the timing in that segment?

Yes and no, is the answer to that question. If you go back and look at the presentation in September, there wasn’t a lot of restructuring in that particular segment because management had been taking out costs all year as the revenue had gone down. So there was not a lot of low hanging fruit per se. There is some restructuring that comes along with the footprint actions, but there isn’t any kind of residual structuring that we're just waiting on timing in terms refrigeration. It's overly material.

Thank you. Good morning.

Good morning.

Hey, I would like to go, Rich to your comment on seeing competition in inks in Markem-Imaje and I don't think I've heard this before because you do make your own inks and the whole kind of proprietary nature of your inks you could only use your inks with your equipment. So how has come competition in inks cropped up into this business?

Well, I should have been more specific. So I apologize. That was a comment about our JK Business that is part of digital printing. It was not a comment. I think the comment I made about Markem-Imaje is performance and its incremental margin was because it was driven by consumables, which is largely ink at the end of the day. So no issues in terms of that side of the business. The competition on inks is more on the digital print side.

Okay, that’s really good to hear. All right. Thank you for that. And then maybe just a broad question about the footprint reductions that you're facing and a lot of questions about like in retail fueling you're cutting back on inventory. What about the other side to this? Are you going to step up and build some buffer inventory to avoid some disruptions as you go through these footprint reductions?

That's two different questions. First, we have more inventory in retail fueling than we would prefer. This is partly due to strong topline growth, but it's significantly affected by our consolidation efforts in the supply chain that began last year. The closure of Malmo and the move to Dundee have resulted in a transfer of a considerable amount of working capital, and it takes longer to process through the systems. Therefore, we are not satisfied with our current performance. While it's understandable, we are not pleased. Regarding inventory in DFS, it depends on how much we can operationally clear out. We have a good backlog, so we should be able to perform well in Q4 and reduce our operational inventory. However, we need to make a decision about EMV for 2019 to avoid being unprepared. I don’t want to find ourselves at the end of Q1 dealing with additional costs for expedited air shipments due to insufficient kits to meet EMV demand. Presently, we are uncertain about the pace of EMV's start in 2019, but I'm confident we'll be cautious and ensure we have inventory to support whatever demand arises.

How about the buffer inventory, just as a safety practice as you embark on these footprint reductions?

Yeah, I think when we do a material one, I think that would be part of the disclosure.

Hey guys, good morning.

Good morning, Steve.

So just to clarify the free cash flow commentary a little bit, you said you're going to be within the range, but it's a little bit of a TBD. Should we just assume kind of the low end of the range I guess is what you're saying, kind of the 8% range for this year?

I think you can assume that it will be in the range, Steve. I can't get down to the level of granularity to say it's going to be 8.75%.

Okay. And just to be clear, the $40 million of restructuring at about 50 Bps of that headwind?

In terms of the cash flow headwind. I haven't made that calculation. I think that we can expect out of the fourth-quarter restructuring charge, approximately, I'd say 50% of that charge would be cash and the balance of it would probably slow.

We also have some carryover. So I think the full year cash flow impact including Q4 is about $59 million, $60 million of cash. It's a little bit higher than 50 Bps if you want to do the math. We also have some carryover. So I think the full year cash flow impact including Q4 is about $59 million, $60 million of cash. It's little bit higher than 50 Bps if you want to do the math.

Okay. And then one quick, just follow up on PID. You are doing I think some restructuring in PID, I would assume or is any of that restructuring related to you know kind of sales or stand or service?

No. It's far more back office, and you saw from our press release the other day about it's about as open our digital center part of that has to do with the fact that of the transfer of some assets between Keane and Boston.

Good morning, everyone. So the queue called out weak refrigerated door case sales, and it kind of implies there's a remodeling aspect to this, which I think you might have even cited somewhere in the queue. Is that a new phase of segment weakness? It may not have as much impact because it's just not as big as the other but I am just trying to dovetail that with Rich your commentary around sort of the pricing dynamic seems to be improving and getting closer to a bottoming.

Okay. Well, nothing has really changed. The build-out of new construction has been weak. What we did not anticipate at the start of the year, and we have been noting throughout the year, is that a lot of maintenance or refurbishment capital expenditures have been deferred or not completed in 2019. The dynamic remains the same, but the rate of decline has eased at the end of Q3 and into Q4. So there is really nothing new there.

Are we seeing maintenance catch up? I'm curious about the context of maintenance and where we stand in the industry cycle. Should we view this as something typically expected or is it a new development? It may not be very significant, but it does imply that industry challenges may persist for some time.

Hard to say right now. My best guess is we're bottoming right now. So worst case scenario it's flat in '19, better case scenario, the maintenance portion of the spend starts to move back up.

50% almost 50% variable contribution margins in ES, is there a mix angle that's driving such a big off-profit improvement in that segment to drive the margins? What's sort of behind the number to cause for that result?

It's a combination of a good mix and strong operational performance. Certain businesses are performing well, with pricing exceeding input cost challenges in capital expenditure leveraged sectors. Some of these are highly engineered products, resulting in excellent margins on that volume.

Just one last question about the restructuring that has taken place from the third quarter into the fourth quarter. In general, when companies undergo these restructuring programs, they often find that after making cuts, they realize there are limits to how much they can reduce. I'm curious about your current situation compared to your initial expectations. Are you experiencing as much cutback as anticipated? What feedback do you have regarding potential opportunities to further reduce overhead costs that you discussed previously?

I think it's a little bit too early to talk about more overhead cost. What I can tell you is that I'm proud of the management team here for embracing the challenge to take the cost out because it's just not easy, but I think that there's a belief that we have a plan in place that allows us to take these costs out while reinvesting in those platforms to make the businesses stronger.

Thanks. Good morning, guys.

Hi Joe.

So Rich, it looked like pricing got a lot better this quarter than it has been the previous two quarters, just maybe talk a little bit about how much of that is tariff-related versus pricing that you're getting and like how should we be thinking about that number moving forward over the next couple of quarters?

It's not materially better pricing; I think it's much more weighted towards mix and price overall. I think that by and large I think that we've done reasonably well in terms of price. Some operations are better than others based on kind of the backlog and uniqueness of the product, but there is not a lot of price. I think that there is you see volume leverage coming through, and you see better mix coming through, more than price. I mean there is a little element of price, but net of all cost headwinds, it's a relatively immaterial number.

Okay. All right. It just seemed like it had gotten a little bit better just based on the queue, but that's okay. Maybe just following through on like the Belvac discussion, so recognize that Belvac surprised you guys, I'm just curious like what are your customers saying? Are the deferrals related to tariff-related concerns? I am just curious if there's any additional color there?

It turns into a confusing situation. There are various reasons for this, all of which are logical. They involve timing related to their own development plans. Additionally, there's a macroeconomic aspect at play. Much of the volume comes from international sources, and there's a lot of noise in the system that seems to be causing companies to be more cautious with their capital expenditure plans. Overall, the projects are still on track, but some of them have been influenced by the general macroeconomic uncertainty.

Great. Thank you very much.

Thanks. Good morning. Just to go back to your previous comment Rich about the pricing. At the queue it calls out 1.1% pricing which is pretty decent. It's certainly a lot better than last quarter. Is that a price mix number or is that pure price?

Yeah, it's a price, it's a pure price right, but it's a pure price net of input.

Okay. I'll pull off, but 1.1% is not bad.

That's for the earnings thing. That's pure price. That's not mix. On the revenue side, it's pure price on the EBIT side, it's a net number.

So my question was really, is that 1.1%, is that fully loaded? Was it some price increases that came through during the quarter that makes Q4 better than the 1.1% or is that a good run rate from here?

No, I think that's a good run rate because our businesses have been added for a while and we're seeing good momentum in certain of the businesses, which have a higher input cost and I feel like it's pretty stable going into the fourth quarter.

Okay. That's helpful. And then Rich, you made small comments, which I thought was interesting. You mentioned that you saw some dealer stocking, I think that was in the sector, but did you see broader dealer stocking during the quarter? And then you mentioned I think the weakening in Europe going into 4Q. Did I just pick up those right?

Sure. Well, look we’ve got businesses that are in certain cases 80% of the revenue goes through distribution. So you can't really see the retail customer. So our revenues are two dealers at the end of the day. So a dealer stocking is not necessarily a bad thing because of the fact our dealers only stock based on their projection of demand. So overall we're talking about some of the smaller businesses like TWG and OKI. I wouldn't be worried about kind of the that we're kind of pushing into dealers and that we're going to have to pay the price for that. I think it's more of a positive comment of some of our businesses that sell through distribution. Our network is positive and they're trying to get their hands on what we make.

Great, thanks.

The second part of the comment was related to foreign exchange. Quarter-over-quarter, there is a challenge with the euro. Brad provided an overview, and based on our forecast using a range of $19.01 to $19.07, we are facing a challenge, particularly with our European leveraged businesses. This is primarily a revenue issue rather than anything else.

Yes, thanks. Good morning. Just looking at your Slide 13, the rightsizing update, I realize this is a little nitpicking but your mix of gross savings has changed a little bit. Can you maybe give us some color as to what's driving, assuming a segment level?

Yeah, I don't think it's a change at the segment level. I think if you notice on the cost side, there's a little bit of cost now associated with corporate well, that's driving a little bit of the benefit side as well. So it's just a minor change.

Okay. Just to confirm my understanding, looking at 2018 and carrying that into 2019, you're indicating that there will be a $10 million contribution from Belvac to operating income that will extend into 2019. Additionally, you mentioned savings from the rightsizing, which I estimate to be another $10 million increment. This brings us to a total of $20 million. Is there anything else we should consider regarding specific drawbacks from 2018 that won’t impact 2019 or any other factors that could help clarify this transition?

I think that’s enough for now.

All right.

I mean we’ll do it when we close the year and we give the kind of the guidance overall, we’ll give you the color of what we think about '19, but right now you’ve got your fingers on the two pieces right. It's in the cost takeout in '18 and the Belvac mix that you can kind of roll forward.

Well, then maybe you'll humor me with one more, that you mentioned this impact from Section 301 tariffs on fluids. I'm wondering can you detail what the magnitude has been and what the drag would be going forward?

You know what, I've got a big spreadsheet in front of me. I can tell you right now that we're covering it through productivity and price. So I don't believe it's a drag. If it's specifically about RF&E, I'm not aware of any material exposure to imported components in that particular segment.

On 301 yeah. Certainly on 232, which we've talked about before, but again we'll have to see how that progresses into '19. but at this stage, Rich is correct, it's not a big number on 301 for us. We don't ship a lot of product out of China into the U.S. and at this stage it's been covered to productivity.

Good morning, everyone. I've got one more on the Belvac push-out. I think Brad said don't expect that to ship in the first quarter. So these shipments have now been pushed out probably close to a year. Do you have contractual protections against cancellations in this? How do you feel about the potential for those orders to not shift to the right actually go away and what gives you confidence that, that won't happen?

There is an amount of progress building and once we start the engineering and the procurement phase, so I don't expect a double negative on an additional push out. And look, we believe that, it's going to roll into '19, but let's be careful. It's not as of January 01. We're going to kick it off and we would expect a big comparable bump on the segment in the first quarter because of that translation right. We believe we'll get it during the year. It's unclear right now when we kick it off.

Okay. Thanks. My second question is on pump and process business. I think during your comments you said that that part of the business realized incremental above 50%, demand there has been pretty good for a while. Can you talk about what's driving those high incrementals in terms of improved pricing in the market versus your internal initiatives that kind of thing?

I think the answer ends up being incredibly granular. I think that overall it's a combination of volume leverage because the revenue has been moving up in the segment, having a direct impact. I think that the fact that they've got in front of their input cost headwinds that they're either positive or net neutral has an impact and then demand is there. So then just pure volume, that’s not kind of the absorption impact of it. So it's a combination of all those. In certain businesses and then you’ve got companies like Precision Components that the nature of that business when it's up is a highly engineered product. So the margins on some of those products are very good and we've got particular strength, as I mentioned at the end of Q2 in our high drawer colder business that we're expanding the footprint of that business because demand has been great and the margins are very accretive to the segment.

Thanks very much.

Just a quick one for me to finish it here. Your comment back at the Analyst rate of 15% to 17%, I just want to go back to your earlier comments on how that's performing and without getting too granular, it sounds like it's maybe getting a little bit better, faster than you had originally anticipated.

I think it's not better and faster. I think we're just happy right. We've been bragging that around for the full year. I think the team has worked really hard in a pretty bad situation, that we had in terms of that consolidation in Europe, but they’ve ground through it and we see ourselves coming out on the other side. So we don't have a lot of negative. It wasn't just the consolidation in Europe. It’s when you can't get the throughput out of that facility, you're making it up and other facilities, which has got supplier premiums and air freight. So there's a lot of kind of additional frictional costs in the system. That’s all coming out because I think that Dundee's has got the feet on the ground now and you couple that with the demand of EMV coming up and EMV products if you will are beneficial to margins of the Group. So we like what we saw of our exit margins in Q1 and that leads us in some amount of confidence in going into Q4 meeting our objectives because from a year-over-year basis what we're looking for is a lot of the year-over-year profit change is going to come out of that particular segment.

Thanks very much for joining us for the Q3 earnings call. We look forward to speaking to you again next quarter. Have a great day.