Dover Corp (DOV) — Q2 2019 Earnings Call Transcript

Thank you, Christy. Good morning and welcome to Dover's second quarter 2019 earnings call. We'll begin with comments from Rich and Brad and we will then open the call for questions. This call will be available for playback through August 8 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, 2256006. Dover provides non-GAAP information such as adjusted EPS results and guidance. Reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on our website dovercorporation.com. Our comments today may contain forward-looking statements that are intrinsically 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 forward-looking statement. Also, we undertake no obligation to publicly update or revise any forward-looking statements except as required by law. With that, I would like to turn this call over to Rich.

Thanks, Andrey. Good morning, everyone, and thanks for joining us for this morning's conference call. Let's get started on slide 3. Q2 organic revenue was up nearly 3% for the quarter, driven by continued strong performance in our Fluids segment at 7% with all markets contributing to comparable growth and solid trading conditions in the industrial platform within Engineering Systems, which were able to more than offset forecasted slowdown driven by timing in our digital print business that I'll get into later in the presentation. Refrigeration & Food Equipment was short of projections principally as a result of tougher trading conditions in Asia for heat exchangers as well as refrigeration systems demand. Forecasted demand and recent customer wins particularly in retail refrigeration case and door give us confidence for an improved second half of the year. Adjusted segment earnings increased 13% to $311 million, contributing to 190 basis point improvement in operating margin over the comparable period. These results were driven by a strong revenue conversion in Engineered Systems and Fluids on volume leverage, good product mix, coupled with improvements in productivity and tight cost controls, more than offsetting raw material and labor cost inflation. Adjusted Q2 earnings were up 15% to $229 million and adjusted EPS at $1.56 a share was up 20%. As announced, we completed the acquisition of All-Flo Pump Co., a growing manufacturer of specialty pumps. This acquisition strengthens our leading position in the growing segment of positive displacement pumps for critical fluid transfer applications. Overall, we're encouraged by the results in the second quarter and the first half of 2019. Demand remains constructive across much of the portfolio. Our rightsizing and operational actions are yielding robust margin improvement. Dover entered the second half with a solid order backlog augmented by recent customer wins and as well as strong momentum and execution towards margin targets. And as a result, we are tightening the top half of our previous full year adjusted EPS guidance range to $5.75 to $5.85 per share. Now that's it for the opening comments. I'll pass it to Brad and then come back with the segment color.

Thank you, Rich. Let's move to slide 4. Revenue increased by 1% to $1.8 billion, driven by strong demand in Fluids and our industrial platform in Engineered Systems. GAAP EPS rose by 25% to $1.35. Regarding non-GAAP results, we saw significant margin improvement this quarter, with adjusted segment EBIT up 190 basis points compared to last year, reflecting our ongoing productivity initiatives. Our SG&A actions from last year are effectively complete, and we are realizing the expected savings. Adjusted segment EBITDA reached $376 million, with a margin of 20.8%. Key adjustments for this quarter included acquisition-related amortization, rightsizing, and other expenses. The EPS growth was bolstered by a $0.02 benefit, or $3.6 million, from discrete tax benefits, consistent with a $0.02 benefit from the second quarter of the previous year. Now moving to slide 5, let's delve deeper into our revenue and bookings results for the quarter. As noted in our summary, organic growth was solid at 2.9%, driven by Fluids and Engineered Systems, and partially offset by Refrigeration & Food Equipment. Foreign exchange rates negatively affected our revenue and bookings, presenting a significant 2.5% or $45 million headwind for revenue, which in turn impacted earnings by $8 million, particularly in Engineered Systems, where printing and identification demand was heavily tied to EMEA and Asia. The two primary contributors to the FX headwind were Europe and China, where average exchange rates fell against the dollar by around 6%. Based on current rates, we anticipate the impact to lessen in the second half of the year. We have used a $1.13 rate for the euro and a $0.15 rate for the RMB in our full year forecast. From a segment point of view, Engineered Systems grew by $12 million or approximately 2% organically, while Fluids grew by $52 million or 7%. Refrigeration & Food Equipment experienced a decline of $11 million or 3%. Organic bookings fell by 1.7%, also negatively impacted by FX. In Engineered Systems, organic bookings dropped by $39 million or about 5.5% due to reduced activity in digital printing and the Environmental Solutions Group. Bookings in Fluids rose by $52 million or 7%, driven by strong order activity throughout the segment. Bookings in Refrigeration & Food Equipment decreased by $43 million. Rich will provide additional details on the order book and specific businesses shortly. Overall, the book-to-bill ratio finished at a solid 1.0, and backlog at the end of Q2 increased by 2% compared to last year, mainly due to Engineered Systems. Geographically, the U.S., our largest market, saw a 2% organic growth, supported by mid-single digit growth in Engineered Systems and Fluids, offset by declines in Refrigeration & Food Equipment. Europe grew by 8%, with all segments showing organic growth, particularly strong in Fluids, which surged over 20% in EMEA. Across Asia, overall revenue declined by 5% organically, with China down by 1%. Our Fluids business grew in the mid-single digits across Asia, with double-digit growth in China fueled by strong performance in both retail fueling and process solutions. However, Engineered Systems and Refrigeration faced declines in Asia due to slower economic activity in the region. Now let’s look at the earnings bridges on slide 6. Starting at the top, Engineered Systems' adjusted segment EBITDA improved by $5 million, primarily due to volume and productivity initiatives, which more than compensated for FX headwinds. Fluids' growth of $35 million resulted from robust expansion, ongoing margin enhancement in retail fueling, and acquisitions. The $7 million decline in Refrigeration & Food Equipment stemmed from reduced volumes for SWEP and slower activity in food retail. Moving to the bottom chart, adjusted earnings from continuing operations rose by $29 million or 15%, mainly driven by increased segment earnings and lower corporate costs, partially countered by slightly higher taxes. Now on slide 7, year-to-date free cash flow stood at $142 million, an improvement from last year both in absolute terms and as a percentage of revenue. The second quarter, in particular, showed favorable results at 8.5% of revenue versus 6% last year. Year-to-date, strong top-line growth was supported by a working capital investment of $164 million, which we expect to convert into cash in the latter half of the year, along with inventory buildup due to volume increases this quarter and anticipation of a strong Q3. The third and fourth quarters are typically our strongest in cash generation. Capital expenditures totaled $91 million year-to-date, slightly below last year's figures. We anticipate our CapEx to increase in the second half in alignment with the seasonality of our cash flows and are still on track to proceed with our previously planned organic growth investments for the year. Let me hand it back to Rich.

Thanks, Brad. Let's move on to slide 9. Engineered Systems delivered top line organic growth of 1.7% largely driven by the industrial platform. As you can see in the bridge, incremental margin conversion on organic growth was over 100% in the quarter, driven by productivity gains and volume leverage. Despite the negative FX translation, adjusted segment margin increased 120 basis points. Our Printing & ID platform declined organically by 3%, driven by the expected slower activity in digital printing due to the ITMA trade show that happens every four years, where customers assess and review the latest technology before making investments. To put that impact in perspective, digital printing was down approximately 20% in revenue and 50% in earnings from the comparable quarter in a business that we forecast to grow double-digits in revenue for the full year. We are encouraged by the pipeline of orders coming out of the trade show, especially in our LaRio industrial printer line and expect the business to reaccelerate into the second half. Overall, the platform performed well in Europe, while Asia experienced continued slowing from Q1. Our industrial platform posted 5% organic growth. Our waste-handling business continued to deliver double-digit growth as demand remained strong for both traditional equipment and software, with software growing by over 20% driven by significant ramp in installations. Despite the difficult trading conditions in the general automotive space, our vehicle service business posted 2.4% growth offsetting the more challenging trading conditions in automotive OEM demand and negatively impacting DESTACO. MPG was down from the comparable quarter due to shipment timing, but exits Q2 with its highest order backlog in many years as demand conditions in the defense sector remain constructive. Going into Q3, bookings for Engineered Systems remained solid. Most businesses posted book-to-bill of around one with a notable exception of our waste-handling businesses where orders were slower versus high comps and record backlog in the comparable quarter. Overall, we enter the second half on solid footing for the segment largely driven by Printing & ID platform, which is accretive to consolidated margins. Moving on to the next slide. The Fluids segment posted strong organic growth of 7.5% for the quarter, with continued strength across all the businesses. Adjusted segment margin increased 410 basis points with incremental organic margin conversion of 50% driven by volume leverage, improved productivity and product mix. Adjusted EBITDA margin increased to 22.9%. Our pumps and process solution business had another excellent quarter posting organic growth of 7%. Demand remained robust for industrial pumps, rotating equipment components for natural gas compression and renewable energy and equipment for polymer pumps and filtration systems. Biopharma and thermal management markets continued to deliver double-digit growth during the quarter, as we ready for a significant capacity expansion in this business. Fueling and transport posted organic growth of 8% as demand remained robust across all geographies for both underground and aboveground equipment systems. EMV demand is forecast to continue to be choppy as all signs point to adoption trajectory continuing beyond 2020 at current activity levels. Margin conversion on volume was strong in the quarter, and we expect that trend to continue for the balance of the year as we track towards meeting the stated margin objectives in the Fueling Solutions business. Bookings in the segment grew 7% organically over the comparable period. The growth is broad-based with particular strength in our plastics and polymer equipment and biopharma businesses. In Refrigeration & Food Equipment, organic revenue was down 2.8% at adjusted EBIT margin of 15%. Demand for the margin-accretive SWEP heat exchanger business was down 6% in the quarter most notably in Asia. Activity in food retail was mixed with systems and service projects posting a decline year-over-year; while our door case product line food retail's largest posted double-digit growth in revenue and backlog as retailers restarted investing in-store formats and refurbishment. United Brands grew modestly despite a challenging comparison to the prior year as several large chain rollouts were shipped on orders booked last year. And Belvac revenue increased modestly however, bookings were slow. The poor mix effect on margins driven by the reduction of heat exchanger and system shipments was further exacerbated by volume ramp costs in retail refrigeration, which struggled with supply chain constraints and labor availability at our principal production site in Richmond. While we are encouraged by the turnaround in demand in food retail for our core case and door products, it is absolutely clear that we need to deliver on our automation project to deliver on volume earnings conversion. Bookings in the segment were slower this quarter posting 10% organic decline, mainly due to lower activity in refrigeration systems businesses and can-making equipment. In Food Retail, recent customer wins versus this time last year give us confidence about the improved revenue outlook for the second half. Moving to slide 12. Slide 12 disaggregates the key sources of EPS accretion for the quarter. Dover continues to deliver on announced cost actions. Incremental margin for the quarter was at 21% and is expected to be the lowest percentage conversion for the year as a result of a negative mix effect on the high-margin Printing & Identification platform in this quarter. Moving on. We are reiterating our revenue guidance for Fluids and Engineering Systems based on order books and forecasted growth in Printing & ID, and have lowered Refrigeration & Food Equipment as we are cautious on Asia and systems demand in the second half. Overall, we are encouraged with the performance in the first half of the year. Organic growth is 5.5% with good margin conversion. We are executing well on productivity and cost initiatives. Demand remains supportive across most businesses, but visibility and sentiment remain cautious in some sectors. Despite the cautious macro environment, we are in control of a significant portion of our year-over-year profit change, and as such, we are tightening on our full year guidance range to $5.75 to $5.85 per share. Lastly as a note, we are targeting mid-September to host a Dover Day in Chicago, where we will provide an update on our progress on previously announced initiatives and a review of our portfolio strategy. We'll provide more information on that soon. So that's the presentation. Let's move on to Q&A.

Thank you. Good morning, all.

Good morning, Jeff.

Hey. First on the product ID and printing businesses thanks for that color on the ITMA effect. But can you give us now a little bit of additional color on what orders ought to look like in Q3? Do we see a big order bump there? And I just wonder, if you can also expand the conversation about that segment to kind of the Markem-Imaje piece of the business also?

Okay. Sure. If we were to normalize our revenue through the quarters, the effect of printing – of digital printing on the quarter was a little bit in excess of 0.5 points of organic growth. So, I mean, we knew this was coming –

For the total corporation.

Yeah. For the total corporation that is not just the segment. Look, we knew this was coming. I can tell you that the feedback that we get in terms of orders in the pipeline is very encouraging. I think that we are very conservative of how we recognize bookings in that particular segment, but we're talking about two million euro – dollar pieces of equipment. So we wait until we have letters of credit in place and a variety of other things before we put them into backlog. I would expect that we'll book a decent portion of that in Q3. But I can tell you that we've already begun to ship in Q3 in that particular sector. So we're – that's why we're confident in terms of the bulk of margin impact on the segment in the second half. As it relates to MI in total, MI had a very good Q1. It was slightly slower in Q2 largely driven by Asia. They had another very good month or quarter in Europe. Our full year expectations is for growth to come back modestly in MI, but margin accretion to be robust in the second half.

And as a second question, if I could. Just on Refrigeration. So your comment about recent customer wins sounds like it's a food comment not a refrigeration comment just to clarify that. But –

That's a refrigeration comment, but go ahead.

So that is a refrigeration comment. So could you elaborate a little bit on that? And I guess the comment about struggling with the volume ramp-up, right? Your orders don't suggest there's a strong volume ramp-up, but obviously you're in kind of a seasonal period. Is that what you're suggesting just kind of normal seasonality there's a little bit of struggle? Or there's something else that –

No. Look, I think the way – what we have is – we have to separate this segment into its component parts, right? So let's put heat exchangers to the side for a moment. What we're saying is on the systems business of refrigeration that's been slow. So that is a disproportionate amount of the decline in the bookings. The bookings on case and door on the other hand are up significantly and our production has ramped up significantly in case and door. Unfortunately, during the quarter that is – because of the labor intensity of that product line, a significant volume ramp comes at some cost that quite frankly we struggled with and coupled with that we had a supplier that went belly up in the middle of the transition. So I think overall it cost us approximately $4 million to $5 million in the quarter kind of let's call that frictional costs with the ramp-up. We will do better going forward from here. But at the end of the day, I think that we're pleased with our ability to compete in the marketplace. We're pleased that the order volume is ramping in door and case. So retail refrigeration is actually moving up right now, but it's absolutely clear in order to change the profitability aspect of this business, we've got to get this automation complete. So we're kind of keeping two balls in the air where we're gaining market share in door and case. We like the way the business is moving. It's going to come at some cost, so we don't have a lot of significant margin accretion associated with that. We'll get some absolute profit increase on the volume. But the margin accretion, I think until we change how we run this business in terms of SKU management and commonality of component parts that's really what's going to trigger.

Great. Thanks. I'll leave it there.

Okay.

Hey, guys. Good morning.

Good morning.

Good morning.

Good execution in kind of an uncertain environment. On the product ID side, you mentioned bookings were down in Asia. Are you seeing anything in kind of the machine builder channel that is a bit more choppy than expected given that there's a lot of cross-border kind of activity for those guys the small machine builders in the U.S. and Europe that are kind of selling into there that your products may kind of go along the same line with?

Steve, I don't know that question. I'd have to go back to the guys and we'd have to see the segmentation of the individual markets that they sell into.

Okay.

I just think that overall...

Would that still be a digital printing issue in Asia for that segment? Or was that seem to be more of a core – a common and kind of core MI into Asia?

The focus is primarily on core MI in Asia. In the digital printing segment, which targets the high-end of the market, demand appears to be strong for the coming years relative to the cost of those machines. I see this as a timing concern. As I mentioned earlier, we anticipate double-digit revenue growth for the full year in this area, provided we secure the necessary letters of credit and align everything according to the expected backlog. However, the MI sector experienced some fluctuations. Specifically, China saw a decline of 1% and India dropped a few percentage points during the quarter. This seems to reflect the situation in China, although I don't have detailed information on the customer segmentation for MI in China and will need to follow up on that.

Okay. No problem. You're plenty busy so don't worry about it. On the price cost, the refrigeration business, which I would have thought needed to get a little more price to kind of offset the material inflation or tariff impacts you didn't get price in that segment. Was that kind of where you probably saw the biggest headwind from price cost? Or do you not really have a headwind from price cost this quarter?

I would need to break it down further, but I believe the retail refrigeration segment is likely neutral. Excluding the frictional costs, which are self-inflicted, we seem to be neutral there. I would also need to examine the other segments. SWEP is complicated since it is euro-based and heavily exposed to China, so we need to clarify that with all the FX translation involved.

Sorry, to give you a long to-do list. Thanks a lot.

Fair enough. No problem.

Yes, good morning.

Good morning.

Just a question on free cash flow. I think you gave a fairly wide target for the year 8% to 12%. You seem to be running well ahead of last year. Where do you think you guys are going to come out within that range given the performance year-to-date? And other than CapEx any sort of big movements in working capital in the second half that we should be aware?

I believe the working capital seasonality should remain consistent. Our goal is to hit the midpoint of the range, which is what we achieved last year. Currently, we are slightly behind on capital expenditures compared to our full-year guidance, so we are likely to end up at the lower end of the range for CapEx this year. The fluctuations in working capital are significant, but I don't think they will impact us overall. Ultimately, as we have mentioned before, we are focused on reducing working capital as a percentage of revenue and improving inventory turnover. The key factor will be the growth rate in the second half of the year. If we see a resurgence in growth during that period, industrial inventory levels may not decrease. Conversely, if growth doesn't pick up, we would anticipate a similar liquidation trend to what we experienced last year in the fourth quarter.

And just a follow-up question on operations just inefficiency at Refrigeration & Food Equipment on ramp-up. Any of it relating to restructuring and operational changes that you guys are making? And just if you can provide us broader color, you've now been at Dover for a while. How do you feel about the runway for cost takeout going forward and ability to execute? And I appreciate that you have not provided any specific targets for next year, but just to give us a broader update. Thank you.

Sure. The margin target that we gave for retail refrigeration at September holds. That requires us to intervene on the production footprint. And as we've said before, that process is underway. But this is not just basically installing some equipment and that changes the business. The business is working on a fundamental change of how they run the business particularly as it relates to SKU management, commonality of components and a variety of other things, which allows for automation in the future. I think that when we announced the investment that we were going to make, we said it's kind of going to be a little bit of a chicken and egg because at the time we were at the bottom of the market in terms of the demand function for door and case. And now that market is coming back and we're going to have to run the business in its more traditional labor intensive way until we get everything stood up. But we need to protect market share and we need to protect the amount of volume that we've got going into fundamentally changing the business. So at the end of the day, I'm not making any excuses for it. I think that we struggled with getting the available labor in the market with employment rates what they are. It's tough. And as I mentioned we had a supplier go belly up on us in the middle or the beginning of the quarter, which cost us some money. So I would expect that we improve over our performance in Q2 but really what's fundamentally going to change this business is changing basically how we manage our SKUs and how much labor content is in this process.

Thanks.

Yeah.

Good morning everybody.

Good morning.

Good morning.

Rich and Brad, regarding Asia and its impact, how much would you estimate Asia detracted from the overall results? You can analyze it sequentially or however you prefer. While we may not be a large player in Asia, it could still be valuable to consider that in our analysis.

I believe Brad mentioned the total translation impact in his comments. There is the foreign exchange component from Asia that you can calculate as a percentage from the $7 million to $8 million translation loss we experienced in the quarter. That's one aspect. Additionally, the quarter-over-quarter profit from MI is primarily driven by Asia. I understand that MI isn't visible at the end of the day, but it needs to be separated from the digital printing impact, and I provided some context regarding what that was.

Right. And then you have the offsets from retail fueling having a really good quarter.

Yeah.

And continuing to have a good quarter in China. So if you pull all that together not having the exact data in front of me, I would say China down slightly in the revs, but earnings still remain positive for us.

Yes. I mean, SWEP was $4 million, so somewhere between $4 million and $8 million probably in the quarter.

Okay. That's helpful. Rich, at the EPG, you mentioned that you thought Dover might be one of the few companies to benefit from these List three tariffs. Could you expand a little bit on that? I have a few questions regarding it. How exactly would that benefit you? Do you think it’s sustainable with some market share opportunities? How is this playing out?

I believe our participation in the markets with critical components has been beneficial, particularly in terms of our cost versus tariffs. Additionally, there is ongoing discussion in the media about companies re-evaluating their supply chains, and we are benefiting from this due to our role as a component supplier closely tied to North American production. While I don't want to suggest there is a conflict, I am optimistic about tariffs. We have positioned ourselves well given the nature of our business. However, if these tariffs lead to a significant slowdown in Asia, as reflected in our results, it could negatively impact our revenue in that region. On the other hand, our North American business has seen positive developments in both price realization and volume.

Maybe just lastly, Fluids obviously put up another very strong broad-based quarter. I guess we can sort of think about things like biopharma doing well on a sustained basis. But maybe you can just talk to your conviction in the portfolio, which I realize has got some niche elements to it. The portfolio overall in Fluids being able to kind of ex compares still put up a cadence of robust growth against the backdrop of a global softening. How should we think about this do you think?

We have a diverse collection of businesses, and there's a lot happening. One area is a high-growth biopharma segment that's been growing in the high teens for some time. This part of our portfolio is both high growth and high margin. Additionally, we have a pumps franchise that is competitive in terms of macro growth and market competitiveness. Although it can be challenging to measure market share in such a dispersed industry, we believe we're gaining ground in that area. As for our Fluids business, our underground franchise is leading the way due to regulatory growth, and we likely have increased our market share there as well. Importantly, as we mentioned last year, our aboveground business has improved its margins by 400 basis points quarter-over-quarter. Overall, we're on track to achieve our goals for the end of the year. We have both high growth sectors and niche franchises, and we are performing well in the marketplace, with one major segment significantly improving its margins.

And is there a runway of deals to do in this space Rich that would meet your returns criteria and pricing and so forth?

I hope so.

I guess, I'll hear more in September. Thank you very much. Appreciate that.

Rich, you mentioned that EPG that DFS would probably reach the bottom of the 15% to 17% margin range for the year. But you just kind of answered John's question and you kind of said that DFS nothing's on track. Obviously, a very strong incremental in the quarter. Did something change? Is it just that they're starting to get their act together there? I mean, you did better all year, but you did make those comments on EPG.

Yes. I believe the exit range we were aiming for is between 15% and 17%. I mentioned we were leaning towards the lower end. Is there a chance we can exceed that? Absolutely. However, let's evaluate the situation over another quarter to see where we stand. I think we still have some challenges in terms of comparable performance before we can be optimistic about margin comparisons, but I'm confident the team is working hard. The fact that we achieved a 400 basis point improvement in the comparable quarter is impressive and sets us on a path to achieve those exit targets. The backlog is encouraging, which helps our position. Ultimately, this feels like a midterm goal for that specific business since, even after reaching the exit, we still have some ground to cover compared to our competitors. Overall, things are going well, and we're very satisfied with the efforts of that business to push through.

That's great. And then last quarter Rich in ESG in particular, you mentioned that you had decent visibility into the business in Q3, but you needed another quarter under your belt to see how the business would fare for the year. So how are you thinking about ESG bookings and revenue growth in particular for the second half of the year? And what kind of visibility do you have at this point?

Look, we feel good about ESG for the year. So I think clearly that when we're looking for that business to slow down, we don't think it's going to this year. We're booked pretty much through the end of Q3. We're waiting on a few orders and backlogs. So hopefully by the time we do this again in another 90 days that the backlog will actually probably stay even to go up slightly, which would solidify the full year. We're very pleased with the growth that we're getting out of the software franchise, so we'd noted that. That particular piece of the business has grown 20%. And it's not margin accretive yet, because it's just on installs, but we expect the leverage on that to be significant going into 2020.

Thanks guys.

Thanks.

Hi. Good morning. Maybe a first question around capital deployment. There was no buyback spend in the first six months of the year, a couple of small acquisitions, and you closed on All-Flo Pump. So, maybe give us some update on at least for this year specifically how you're thinking about capital deployment. I understand we'll hear about the medium term in eight weeks' time.

Well, I mean in general terms Julian it's basically what we said before all right? Our bias is for organic investment followed by inorganic investment going to capital return. I think that we've got a relatively robust pipeline on the inorganic side, so we'll keep our powder dry to see how that develops over the next few months. If we are unable to close on those, then we'll revisit the issue of capital return for sure.

I see. So, if we don't see a big step-up in M&A, we can expect more buybacks by year-end?

At some point, we have an expectation regarding cash flow for the year. We won't hold onto a large amount of cash with negative carry; we would rather deploy it.

Thank you. For my follow-up, I'm interested in the overall profitability in Refrigeration & Food Equipment. Should we anticipate that profits in this division will remain relatively stable year-on-year for 2019, or is that largely influenced by the productivity initiatives at the Richmond site?

Our expectation is for revs and profits to be up year-over-year.

Thanks. Good morning. We've touched on a lot already, but I do want to pick up on the last question from Julian. The growth in Refrigeration & Food, we've got a slight down organic in the first half of the year. Backlog is pretty flat. We burned backlog in 2Q modestly. What is the degree of conviction in the second half moving to sort of a 3% 4% organic growth rate?

Well, I mean look at the end of the day I think we moved the segment down by one point. Okay? I think that our conviction in food retail for growth is quite high. We actually missed from a calendarization point of view. In order of that we would've liked to have been able to book at the end of June, but can't book until you have the order at the end of the day.

That's coming in now.

Bookings as we move into Q3 look promising. Our focus is on improving margin conversion in that segment, and we have specific goals in mind. However, we recognize the need to change how we manage products and reduce labor costs, which won't yield benefits until mid-2020. Overall, we are encouraged by the demand for doors and cases, and it's crucial for us to enhance profitability in the second half of the year given the current marketplace conditions.

Thanks. That's great color. And then maybe just characterize what you're hearing from kind of your field organization your channel partners. And the spirit of the question really is that some of the distributors in the U.S. have been talking about a change in customer behavior through June towards the end of last quarter. And you alluded to kind of lower end of the CapEx for the full year. And I'm wondering if maybe you're pulling back a little bit or dialing back a little bit on investment spend in the back half of the year because I think that was more back-end loaded in your plans. Any color on that would be great.

I will start with the second question and return to the first. No, we are not reducing our capital expenditures. As is often the case, we have plans to spend this money, but it takes time to actually implement those plans. For example, with our new plant in Minneapolis for CPC, obtaining building permits and addressing various other requirements can delay things by about three months. Therefore, while capital will be deployed overall, some of it will likely carry over into 2020 due to timing issues. However, we are not backing away from our goals. We provided a range, and it appears we will likely come in at the lower end of that range based on the current timeline. Given the variety of businesses in our portfolio, there is a lot of mixed messaging from the market. Generally speaking, the sentiment was more negative at the beginning of the quarter compared to the end. We experienced concern about backlogs back in April, but we actually improved during the quarter in terms of our shipment performance and backlog. It is a somewhat unusual situation regarding the feedback from the market and its impact on our forecasting. As we conclude the quarter, based on what we can control and what needs to be done to reach the upper end of our range, I believe we are in a strong position.

That's a very unusual situation. Thank you for the insight, Rich, and good luck. Thank you.

Thanks.

Hi, good morning guys.

Hey Scott.

I can't remember if you mentioned this at EPG or not but what were the return kind of hurdles that you crossed for this All-Flo Pump? Is it double-digit by year four or something like that? Or did you not mention that yet?

It's 10% by year three.

10% by year three. Okay. And then I have question. I covered your stock for a while and I don't know the answer to this. The environmental solutions business you mentioned software sales and I just can't recall what that is. Can you share your memory on what you're selling?

Dover made an acquisition a couple of years ago called 3rd Eye. That guy was principally there for doing driver safety, but it's managed now to expand what it sells around that camera technology that is quite interesting. And the adoption rate over the last six months had some major independent carriers have been excellent.

Can you provide an assessment of the size of that business? Is it substantial enough to make a significant impact?

I hope so in the future. I can just tell you that in the context of ESG, yes, I mean, it's significant enough to impact results over time.

Okay. And then just one last question regarding the portfolio. I imagine we will discuss this further at Dover Day in mid-September, but are you generally satisfied with the portfolio you have now, Rich? I know there are some challenges in Refrigeration, but if we look ahead five years or even two years from now, will there likely be additional divestitures?

Well, I don't want to get ahead of our big presentation in September. Nothing in the portfolio is destroying capital at its present. But five years from now, is the portfolio going to look different than it is today? The answer is yes.

Okay. All right. We’ll see you in September. Thanks guys.

See you Scott.

Yes, thanks and good morning. Just want to go back to your comments from about two minutes ago on just trends through the quarter. I mean, I understand your comments on Asia and maybe portions of the business in there being a little bit weaker, but it seems to me that everything else is trending pretty well. So I guess against this theme, if you would of macroeconomic uncertainty, can you kind of help us understand if there is anything that slowed maybe through the quarter, where was it? And if things maybe held better than what you anticipated at a point in time in April for instance, where did you get a little bit of upside?

The entire Fluids segment is performing slightly better than we expected. We're pleased with the earnings trajectory. However, we didn't anticipate the slowdown in heat exchanger demand during the second quarter, nor did we foresee the impact of foreign exchange, which likely cost us about $7 million to $8 million in profits for the quarter. There are certain parts of the portfolio, like our limited exposure to automotive OEM, that we expected to slow down and did so in the quarter. We had already factored that into our full-year forecast from last year. We also did not predict the frictional costs in Richmond due to labor shortages and a supplier issue. As for DDP, we had anticipated that situation in the quarter, so it wasn’t unexpected. The heat exchanger business and the foreign exchange translation were areas where we would have liked to perform better compared to our initial forecasts at the beginning of the quarter. Additionally, we were hoping to secure a couple of orders in June that did not materialize. Regarding DDP, although we participated in a trade show and received positive feedback, we did not secure any bookings in Q2. If we can convert that interest into bookings in Q3, we expect to see a significant rebound there.

All right. That's helpful. And then, maybe for my follow-up, I saw last night you announced the partnership with ABB for Dover Fueling. So, maybe you can give us some thoughts here as to what the revenue model might be, the growth opportunity, how do you see the retrofit of existing infrastructure? What's the game plan?

Well look, I can't monetize it for you right now. We just signed it yesterday. But in effect, we've always said that we recognize the fact that EV chargers, there's going to be somewhat of a future on that. We can all debate what the size of that is. But, we've signed a Europe contract with ABB where we'd be purchasing chargers for resell into both our distribution and direct customer network and then we'd be moving to purchasing kits that would be incorporated into our dispenser factory over time and spare parts. So too early to start to say size and scale, but I think it was important that we develop partnerships because we're very attractive to manufacturers of charging stations because of the size and access that we have to distribution network and our OEM customers.

Do you foresee the need to change the way you operate or go to market in order to capitalize on this opportunity, or will you primarily rely on your existing customer base?

The latter.

All right. Thank you.

You're welcome.

All right. Thanks. Good morning, guys.

Good morning, Joe.

Discussing the benefits of rightsizing for a moment, it’s clear that you have performed well in this area, showing about a $0.30 benefit so far this year. It seems likely that we will be mostly through this process as we approach the third quarter. Considering this, how do you view the role of improving leverage from your organic volumes in relation to achieving your guidance for the second half of the year? What are the key factors involved?

Yes, I understand your question. We anticipated that. If you review my previous comments, we mentioned that the margin conversion in the second quarter is expected to be the lowest for Dover for the entire year. Therefore, when you examine the EPS impact of that conversion, we anticipate it to improve in the third and fourth quarters compared to the second quarter, and that the SG&A expenses will gradually decrease. However, I believe all of this is accounted for in our plan to achieve the upper end of our EPS guidance.

Got it. I mean – I'm sorry. Go ahead, Brad.

Yes. So, Rich is referring to the 21% on the chart. You see the 73% there with SG&A, but the 21% is going to improve in the back half.

Got it. And the biggest drivers of that, if I'm hearing you guys correctly, is going to come in RF&E and then potentially with digital printing picking back up in E&S? Or are there other moving parts?

We expect strong performance in Engineering Systems driven by the Printing & ID platform. We anticipate continued robust conversion in aboveground fueling systems regarding margins. Additionally, while we are making progress in improving performance in RF&E, it will continue to have a negative impact on consolidated margins.

Thank you. Good morning everyone.

Hi.

Hey, just want to follow up on that last comment on digital printing. The idea here is purchasing managers were out of pocket, so there was no ordering. But when you talk about normalizing, did you launch any new products at the trade show that would create some incremental demand? Or is it the same product line and just a catch-up on orders?

We launched the Mini LaRio product along with several software solutions and a bundle of consumable products with a large printer. We introduced a range of different items. However, even without these launches, we would have experienced the same demand dynamics because the event occurs only every four years. This leads to a situation where everyone waits to see the latest products and pricing conditions and other factors.

And if I go back to what Rich said, the order take was very good at that show, but we're not showing them in our bookings until we get the credit lined up with our customer base. You can imagine, we ship those all over the globe and we're very conscious of being paid for what we ship. So we line that up first.

Got it. And then, just a clarification on heat exchangers. That came up a number of times. The size of it, I think you said $4 million. But what do you attribute the slowdown or the falloff in demand? Was there any share loss? Is this trade uncertainty? But what would you point to there?

Yes. I tend to avoid categorizing any of our businesses as being driven by macro factors. What I can share is that the primary influence was mainly in China and focused on our non-refrigeration product line or HVAC.

Yes, non-HVAC.

Non-HVAC product line, so industrial applications.

Got it. Thank you.

Thank you. This concludes our conference call and we thank you for your interest in Dover and look forward to speaking to you next quarter.