Dover Corp (DOV) — Q3 2019 Earnings Call Transcript

Thanks, Stephanie. Good morning and welcome to Dover's third quarter 2019 earnings call. The audio portion of this call will be archived on our website for three months. Dover provides non-GAAP information and reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on our website. Our comments today may contain forward-looking statements. 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 statements. 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.

Thank you, Andrey. Good morning, everyone and thanks for joining us this morning's conference call. Let's get started on slide 3. Q3 organic revenue was up 6% for the quarter. The growth was broad-based across the portfolio and was positively impacted by improved production performance allowing us to ship product at a higher rate than Q3 last year, particularly in the Fluids segment. Bookings in the quarter were solid with 7% organic growth with Fluids and Engineered Systems posting book-to-bill above one. Adjusted segment earnings increased 17% to $320 million, contributing to a 180 basis point improvement in operating margin over the comparable period. These results were driven by strong revenue conversion on volume leverage and continued improvements in productivity and cost controls more than offsetting unfavorable mix and labor cost inflation. Adjusted Q3 earnings were up 15% to $235 million and adjusted diluted EPS of $1.60 a share was up 18% year-over-year. As mentioned during our investor meeting in September, this is the last period in which we'll report under the legacy segment structure. Starting at Q4, we will report using the new structure and provide full year comparative data. Overall, we are encouraged by the results in the third quarter and first nine months of 2019. Our revenue has increased organically by 5.5% year-to-date and our rightsizing and operational actions are yielding robust margin improvement with a resulting increase in comparative free cash flow. We are entering the last quarter of 2019 with a solid order backlog across all our businesses, as well as strong momentum and execution towards our margin targets. And as a result, we are tightening our full year adjusted EPS guidance to the top end of our range from $5.82 to $5.85 per share. I'll pass it over to Brad here.

Thanks, Rich. Good morning, everyone. Let's go through the details starting on slide 4. All-in revenue grew 4% to $1.8 billion and was driven by strong demand throughout our Fluids and Engineered Systems segments. GAAP EPS increased 33% to $1.40. Moving to non-GAAP results. As mentioned, we achieved significant margin accretion in the quarter with adjusted segment EBIT up 180 basis points over the prior year, reflecting strong conversion on increased volume and continued execution of productivity initiatives. Adjusted segment EBITDA was $385 million, a margin of 21.1%. Key adjustments for non-GAAP results this quarter were acquisition-related amortization and rightsizing and other expenses. The EPS increase was supported by $0.04 or $5.2 million of discrete tax benefits, slightly below the $0.05 benefit in the prior year. Turning to slide 5. Let's get into a little bit more detail on our revenue and booking results in the quarter. As mentioned in our summary, organic growth was solid at 5.6%, driven by Fluids and Engineered Systems and partially offset by Refrigeration & Food Equipment. As you can see, foreign exchange rates negatively impacted our revenue and bookings. FX was 1.6% or a $29 million headwind for revenue, which had a $4 million impact on earnings, with the most notable impact on our businesses levered to Europe and Asia. We expect these FX headwinds to persist in the fourth quarter. From an organic growth perspective, Engineered Systems grew $42 million or approximately 6%, while Fluids grew $68 million or 10%. Refrigeration & Food Equipment revenue decreased by $12 million or 3%. Bookings increased organically 6.7%, and all in were negatively impacted by FX. At Engineered Systems, organic bookings increased $61 million, or approximately 9% driven by strong order intake in digital printing and the Environmental Solutions Group. Bookings in Fluids also increased $61 million, or 8% organically with strong growth in the fueling and transport and process solutions markets. Bookings in Refrigeration & Food Equipment declined $8 million. Finally, our book-to-bill finished at 0.99, while backlog at the end of Q3 was 3% higher than this time last year driven by Engineered Systems and Refrigeration & Food Equipment. From a geographic perspective, the U.S., our largest market grew 7% organically driven by strong performance in Engineered Systems and Fluids, partially offset by Refrigeration & Food Equipment. Europe was up 8% with all segments posting organic growth and a particularly strong quarter from Fluids which was up nearly 20%. All of Asia grew 6% organically with China driving the growth at 20%. Our Fluids business was up 6% in Asia overall with nearly 30% growth in China on the strength of both retail fueling and process solutions businesses. Engineered Systems was up 10% in Asia whereas Refrigeration & Food Equipment was down mid-teens, primarily due to slower demand for heat exchangers in the region. Let's go to the earnings bridge now on Slide 6. Starting on the top, Engineered Systems adjusted segment EBITDA improved $17 million, largely driven by volume and productivity initiatives more than offsetting headwinds from FX. Fluids growth of $35 million reflects a combination of robust growth, continued margin improvement in retail fueling, and acquisitions. The $7 million decline in Refrigeration & Food Equipment reflects lower volumes for SWEP heat exchangers and slower activity in food retail. Going to the bottom chart, adjusted earnings from continuing operations improved $31 million or 15%, primarily driven by higher segment earnings, partially offset by higher corporate costs and taxes. The effective tax rate excluding discrete tax benefits is approximately 22% for 2019, 30 basis points higher than the prior year on a comparable basis. Now on Slide 7. Year-to-date free cash flow was $447 million, a $163 million improvement over last year. Our cash flow was strong in the third quarter at 16.7% of revenue versus 11.8% in the comparable prior period. Despite strong top line growth through the year, our focus on working capital efficiencies drove a net improvement year-over-year. As we turn our attention to the fourth quarter, given the uncertain macro environment, we will manage our production schedules to meet our cash flow objectives. The fourth quarter is traditionally our strongest cash flow quarter. Capital expenditures were $137 million year-to-date, slightly ahead of last year. While we expect our capital expenditures to ramp in the fourth quarter, we do expect several of our investments planned for 2019 to carry over into 2020. With that, let me turn it back over to Rich.

Thanks, Brad. Let's review the segment slides. Engineered Systems achieved organic growth of 6.3%, primarily supported by our industrial platform. The incremental margin was robust, surpassing 50% as we effectively managed volume growth in digital printing and refuse trucks while enhancing efficiency across our operations. Our Printing & ID platform grew organically by 4%, spurred by activity in digital printing, following a strong order pipeline from the ITMA trade show in June. The platform showed solid performance, especially in Asia, where the increase in digital printing shipments compensated for weaker demand in marking and coding in China. The industrial platform reported 8% organic growth. Our waste handling business posted double-digit growth, driven by strong demand for both traditional equipment and software, with our digital solutions business growing over 50% year-over-year. The vehicle service business experienced 8% growth due to stronger aftermarket demand in Europe, which had been sluggish in recent quarters. DESTACO faced slow automotive OEM demand, and MPG was flat for the quarter because of the timing of orders for a specific defense program, although it still has a significant backlog as the defense sector shows positive demand conditions. Bookings for Engineered Systems were solid, with nearly all businesses reporting a book-to-bill ratio above one, particularly strong in digital printing and waste handling, which secured several large orders to bolster a healthy backlog. Overall, we entered the last quarter with a strong position for the segment, mainly supported by the Printing & ID platform, which positively impacts consolidated margins. The Fluids segment experienced nearly 10% organic growth for the quarter, with all businesses showing strength. The adjusted segment margin increased by 340 basis points, with incremental margin of over 50%, driven by volume leverage and enhanced productivity, which outweighed negative geographic and product mix effects. The adjusted EBITDA margin rose to 24.2%. Our pumps and process solutions business had a strong quarter with 9% organic growth. Maag reported significant third-quarter deliveries in the European and Asian plastics and polymer markets, which are expected to be more pronounced in Q4. The biopharma and thermal management markets continued to show double-digit growth during the quarter. Shipments for our industrial pumps and precision components business remained strong despite a cooling macro demand environment. Fueling and transport recorded 11% organic growth as demand remained solid across all areas for both underground and aboveground equipment systems, particularly in China, which is nearing completion of its underground piping upgrade cycle. EMV demand in the U.S. improved moderately but was still inconsistent and did not significantly contribute to growth. The segment's bookings grew 8% organically compared to the previous period. While the macro environment indicates some slowing in certain end markets, we remain positive as the segment approaches Q4 with a backlog that is roughly flat year-over-year, although more focused on long-term projects. Refrigeration & Food Equipment saw organic revenue decline by 3%, with an adjusted EBITDA margin of 13.3%. Margins were impacted by lower volumes and frictional costs as we continue restructuring our manufacturing footprint in this segment. Activity in food retail was mixed. Systems and services projects continued to decline year-over-year as new store activity remained low. However, our core case—the door case product line, which is the largest in food retail—showed double-digit growth in revenue and backlog as retailers proceeded with store remodel investments. SWEP had a flat quarter as improved European demand was offset by ongoing weakness in heat exchanger demand in Asia. Bookings in the segment fell by 2% organically, mainly due to reduced activity in the refrigeration systems business. We head into Q4 with two-thirds of our revenue in backlog for the food retail sector and a positive outlook for booking shipments against several large contracts signed last quarter. SWEP and Belvac also enter Q4 with an increased backlog compared to before. Moving to slide 12. Slide 12 disaggregates the key sources of EPS accretion this quarter. Solid growth and operational actions continue to yield strong results driving the majority of the 18% EPS growth. Incremental conversion of the margin for the quarter was 60%. We are reiterating our revenue guidance for Engineered Systems and tightening upward the guidance for Fluids. Recall Fluids posted 17% organic growth in Q4 of 2018, setting a high watermark for the comparable period this year. We expect Refrigeration & Food Equipment to post flat revenue in 2019 after an 8% decline in 2018 as the market stabilizes after resetting to remodel driven demand. Overall, we are encouraged with the performance so far this year as we continue to deliver robust organic growth and margin conversion. We are executing well on productivity and cost initiatives and are working closely with our customers to sustain growth. Demand conditions remain constructive across most businesses, but visibility and sentiment are cautious in some sectors. We have a lot on our plate between now and the end of the year with several major capital projects underway and an interesting inorganic pipeline, but we remain focused on closing out 2019. So to wrap up, despite the uncertain macro environment, a strengthening U.S. dollar, and a challenging Q4 revenue comp, we are well-positioned to deliver a solid close to the year for both cash flow and earnings. And as such, we are tightening our full year guidance to the top end of the range from $5.82 to $5.85 per share. And with that, let's move on to the Q&A.

Stephanie, let's open the Q&A.

Good morning, Rich.

Good morning, Andrew.

Hi, good morning everybody else. I landed at 3 last night. Sorry, I'm still trying to wake up. Look, let me ask you a lot of questions from investors on bookings. Those were very good. And given the tough comps in Q4; A, how much of one-time stuff did you have in the third quarter because it does seem that you were helped by the Printing & ID? I think some of the refrigeration bookings maybe happened that you got in second quarter, happened in third quarter sort of. So how much of one-time stuff did you have in 3Q in terms of robust bookings? And can you think you can deliver positive bookings in Q4?

I don’t want to comment on where we will end up with Q4 bookings. We’re looking forward to seeing how that turns out. However, let me provide some context. Much of our performance in Q3 was influenced by production efficiency and, to some degree, the timing of orders. Last year, in the Fluids segment, we were recovering from a period of high backlog caused by difficulties in product delivery at the same time. This year, our production performance in retail fueling improved significantly, positively impacting both revenue and margin. Additionally, in the Pumps and Process Solutions business, especially in MAAG, we effectively achieved our Q4 results in Q3, which allowed us to deliver products on time. However, this also makes our Q4 comparison more challenging than we initially anticipated. The reality is that if we have completed production and the products are ready, we should ship them. Regarding backlog, our position looks strong and sets us up well. Still, it's important to note that in ESG, much of our backlog is moving into 2020 instead of being converted into 2019, particularly in MAAG and precision components, which involve longer-term contracts. While we are pleased to have them for shipping next year, I don’t think we will be able to convert them in Q4 due to the lengthy production cycles.

Thank you. And then the question on Refrigeration. What's happening to labor cost in Refrigeration? And any way of sizing the OpEx investment around the planned automation into 4Q and into 2020?

The main issue in Refrigeration is not the labor cost itself, but rather the availability of labor, which leads to increased overtime. Consequently, while the overall labor costs are rising, the primary challenge we face is not the hourly wage but the lack of available workforce. We are running a lot of overtime to meet production demands, which is negatively affecting our profit margins. However, we aim to address this in the future by automating processes and significantly reducing the labor requirement. If you examine the profit and loss statement, you will see that labor costs are increasing, but this is not due to higher rates; it is primarily caused by the amount of overtime we are working.

Rich, Brad you made it look easy this quarter. Thank you.

Thanks.

Congratulations.

Thanks.

Good morning everybody.

Good morning, John.

So Fluids, looking at your guidance for organic revenues this year, it suggests a high single-digit decline in the core. Rich, you mentioned some factors related to the timing of the MAAG pull forward. Is that correct? Am I right about the expected high single-digit decline for Fluids in the fourth quarter? Is there anything else happening that could potentially improve that business compared to current expectations?

I believe we've been clear all year that the comparison for Q4 in the Fluids segment will be challenging due to a 17% growth in Q4 last year. It will be interesting to see how the new segments perform, as bookings and revenue show two distinct types of business: short-cycle demand, like fueling systems, and long-cycle demand. Currently, our backlog has increased, but it's leaning towards longer-term projects such as DPC and MAAG. This doesn't imply that fueling solutions will perform poorly in the fourth quarter, but we have to consider that last year we shipped a lot due to a self-imposed backlog. This year, we've improved our production performance, which is evident in our margins. Essentially, what's happening is primarily due to timing differences in production performance.

Part of the issue is that we will face tough comparisons during the first three quarters of next year as well. Given this, will it potentially dampen growth in a similar way? I also understand there were some one-time factors in the fourth quarter.

Look, if I look at estimates for top line growth for '20 today and we haven't given out any guidance for '20, but if I look at it, I don't think that we will have an issue based on our backlog right now.

Got it.

But clearly, I've read several research reports regarding the idea that we might miss Q4. However, we just surpassed expectations for Q3, so it is assumed that we need to temper our Q4 projections. We have been quite clear that the top line would face a challenging comparison for Fluids in Q4.

No, that's clear. The RF&E segment did not show any sequential improvement, as the margins deteriorated. You explained that part. The question is if you still see a path to achieving 15% to 16% margins in retail refrigeration that you previously outlined.

I do. I do. Look, we're in the midst of consolidating on UB's platform which is causing some consternation in terms of getting the product out and some transitional costs because we're going from five to three in terms of the footprint. And we are throwing labor right now at increased volumes in door case and it's costing us some money to do that. But I think we should have some good news in terms of backlog based on what I can see in door case leading to Q4, despite the fact that Q4, the seasonality is usually one of the worst quarters. But I think we're lining up to have some good news in terms of bookings at least going into '20.

Given the challenging economic conditions, how did the third quarter perform for you? Typically, September is a strong month for many industrial companies. Were there any unusual trends as you went through July, August, and concluded September and October?

There is a level of caution in the distribution sector as everyone tries to manage their inventories as the year comes to a close. We performed better than expected in the Fluids segment, particularly in the underground area, due to the ongoing changes in the regulatory environment regarding piping. The team did an excellent job of getting the product out, but this has somewhat affected our performance in the fourth quarter, which we anticipated would slow down heading into 2020. We are focusing on maximizing our performance, but overall market sentiment is not as positive as it was during this time last year.

It's refreshing to hear a company not managing quarters, but actually just getting the stuff shipped. Very much appreciated. Thank you.

You're welcome.

Hey good morning guys.

Good morning.

Good morning.

Rich, so food margins have continued to rise. And you talked at the Analyst Day that fueling solutions continues to be a near-term opportunity for margin enhancement. Are you basically at the point now through restructuring that you got to the 15% to 17% margin in DFS? And as you've gone through it, have you found incremental margin opportunities? Or are the strong incrementals in that business really just a function of the strong growth that you've had?

There are two aspects to consider. When we talked about the margin catch-up opportunity, we referred to the aboveground part of fueling solutions. While we don't disclose that figure, I can say that's where a significant portion of our year-over-year margin improvement has originated. The team has performed exceptionally well in that area. On the belowground side, it's mainly about volume. We've had arguably the best margins there, and the execution has been solid. I believe we've gained market share in that segment. However, I don't think we've maximized our potential in the aboveground portion. As I mentioned in September, we need to focus on improving our margins in the EMEA region. Overall, we're reasonably satisfied, but we don't feel we're at the limit of our capabilities.

Got it. And then, just talking regionally about your performance, obviously you just mentioned the underground inflection has had a regulation in China. But China was a bit weak for you last quarter. Obviously, very strong this quarter and Europe continues to be strong. So, maybe you can talk about those particular regions and what you see going forward. Did you see any stability for instance in businesses like MI in China? Or have they continued to weaken?

I believe the rate of decline in MI has remained stable compared to last quarter. It neither worsened nor improved. We performed better than expected in the Fluids segment, particularly with our underground fueling solutions, which may have contributed to some advanced sales. The EMEA region can be unpredictable for us due to significant businesses that rely heavily on exports. We strive to accurately recognize revenue, but with the digital printing business, for instance, which had a strong quarter as we anticipated, all output is recognized in euros while being exported worldwide. Therefore, our euro or EMEA figures often reflect more of the MEA situation than the E.

Yeah. Thanks guys. Nice quarter.

Thanks.

Thanks. Good morning, guys. Hey, just back on fueling, Rich, I think you just said you got more runway there. Not surprised to hear that. But the improvement that we're seeing, would you call this still just kind of better operational execution among the business as it sits today? Or are we seeing kind of fruits of really trying to maybe better integrate OPW and Tokheim and Wayne and just thinking about what was rolled up in prior years and maybe wasn't really fully stitched together?

I believe it leans more towards the former. Many of the operational issues we faced last year have not been completely resolved, but a significant portion has been addressed. When I mentioned the improvement in production performance from quarter to quarter, that's what I was referring to. We've made considerable initial progress in integration, particularly in Europe. However, we need to keep focusing on this area. A lot of effort has gone into preparing for the harmonization of our platforms between Wayne and Tokheim in Europe, but I don't think we are seeing the benefits of that yet; those are still to come.

And you said that EMV did not contribute to growth. Does that mean it didn't grow? Or it didn't grow at a different growth rate than the segment?

It grew, but it did not materially impact the growth rate in Q3.

And just one last one, cases versus doors. Were you saying just doors were up double-digit? I didn't really catch that.

No. It's an integrated offering now almost. It's door case.

Yes. Okay. Up double digit in the quarter?

Yes. Welcome.

Thanks. Good morning, guys.

Good morning.

Good morning.

So, great, so free cash flow in the quarter. And obviously free cash is being a little bit lumpy. You've got strong growth, no surprise there. But Brad, you called out the seasonality impact in 4Q. Normally 4Q cash flow is higher. Number one, do you feel comfortable that you can grow free cash flow sequentially from what you did in 3Q? And therefore, I'll be pushing towards the upper end of the range in terms of the free cash margin guidance.

Yes. Okay. Well, quite frankly, we're pleased with the execution here in Q3. And also, I think, it's the first time we're actually calling out that we've made progress on our working capital, which is great to see. We're continuing those actions into the fourth quarter. The thing we did point out and we continue to say is, that this is going to be a more heavily invested year, which means we're set up to have a stronger CapEx spend in the fourth quarter. Having said that, I still see that into the fourth quarter and we'll be delivering strong cash again year-over-year. So we feel confident about our cash flow for the year.

Okay. I think that's good enough. And then just – obviously, most of the metrics came in extremely strong. If I had to be critical, gross margin conversion was not a great quarter if I sort of like sort of dig into kind of what needs to improve. So maybe just unpack gross margins and the – that decline, I think, it was year-over-year. Kind of what impacted that maybe price/cost mix? And then, Rich, what improves in 2020 in terms of getting that gross margin converted better?

It was more of a mix than anything else. When we break it down between the challenges of input costs and labor inflation versus pricing, we’re doing better than neutral on tariffs. Ultimately, it comes down to mix, which is something beyond our control. For example, VSG achieved impressive top-line growth, but their gross margin dropped. This is all related to mix, but we believe over time we can address it since it involves a specific product line that is currently ramping up, and we are managing some associated costs. There are numerous initiatives in progress that may lead to some negative mix effects. This isn’t driven by pricing; we are not attempting to gain market share, but rather we are dealing with some temporary issues linked to the development of new product lines. Looking at the geographical mix of our revenue, it's important to note that Fueling Solutions' EMEA margins are below consolidated margins, even though they performed well this quarter. We will accept the revenue and the overall earnings, but it results in a negative mix. The mix is not something we can fully control. We are striving to be disciplined with our pricing and other factors, but we don’t want to compromise our top-line growth in the pursuit of managing gross margin.

Absolutely. Thank you very much.

Thanks a lot. Good morning. Just wanted to ask a first question around Refrigeration & Food Equipment demand, not so much around door versus case or door case bookings in Q3 versus Q4, or whatever. But just last year, as you said, organic sales down 8%. This year maybe flat – flattish let's say. How do you think about the overall customer spending environment? Maybe for 2020 or even for the medium term, do you really think this is a floor in sales for that segment? And where you think we are on the sort of replacement cycle for customers?

I believe the market is evolving as we anticipated, shifting towards repair and refurbishment, which is positive. This trend is what is driving the door case volume. However, the greenfield build-out remains weak, negatively impacting systems. It's difficult to predict systems performance moving forward, as demand is quite low at the moment and there isn't much of a greenfield expansion happening. On a brighter note, we are seeing some encouraging signs in door case demand, which constitutes the majority of our business, and we are actively addressing its cost structure. Based on our current observations, as I mentioned earlier in the call, I am hopeful that we will have some positive news regarding bookings and door case closures in the fourth quarter, which would position us better for 2020 compared to 2019 on the systems front. I believe we are currently at the lowest point.

And if you think about what that means for margins, I mean, this year in Refrigeration & Food you've got flattish sales, margins down slightly probably for the year. If you had flattish sales in 2020, do we think the margin performance can be better?

I hope so. I mean a lot of that is going to be predicated on how we execute on the startup of our automation on the Hillphoenix side of the business. So I would expect that we're going to have some hiccups in Q1 and Q2. I mean, it's a pretty big project, but I think overall I think that we can post increased margins that we're expecting to post increased margins on the top line next year.

Thanks. And then just my second and last topic would be around capital deployment. Buyback spend in the nine-month period I think $23 million so very, very low. I think in the prepared remarks you've mentioned some attractive M&A opportunities. Maybe just flesh out how you're thinking about that and whether there are a lot of opportunities that you can still do at that 10% year three rolling hurdle rate.

It's interesting to note that the number of opportunities has significantly increased over the past six months, but the pricing environment remains challenging. We missed a deal in Q3 that we would have liked to pursue, as we were outbid at the end. Nonetheless, we currently have a much stronger pipeline compared to last year. It will be crucial to see if we can align on valuations and successfully close these deals. We're optimistic that the number of attractive opportunities will lead to increased activity.

Great. Thank you.

Hey, good morning guys.

Hey, Scott.

Good morning.

Richard, have there been any significant changes in the M&A processes? Specifically, what adjustments are you making regarding the team, the process, the filters, or anything else since you started?

I guess that's hard for me to say. It's been the same for the 1.5 years that I've been here and I've never retrospectively looked back at the processes in the past, but I think that we've got a pretty robust process for it right now. We walk away from quite a bit unfortunately considering the pricing environment. So we got to have the discipline. Like I just mentioned, we spent a lot of time and money on one that we just lost out on due to valuation in the quarter and that's life sometimes. So I can't speak to the past of the process. I can just say that we are confident in the team that we have here that is objectively evaluating these businesses.

And just to follow up on that, where do most of your opportunities come from? Are they from existing books, sponsorship deals, internally generated initiatives, or a mix of all these sources? Just…

It's a combination of all. It's a combination of all.

Fair enough. Thank you guys.

Oh, hi. Good morning guys. This is actually Pat Baumann on for Steve Tusa. Thanks for taking my call. A question and I missed it at the very beginning part of the call so I apologize if this is repetitive. But as you look at the segment guidance for organic growth and you look at the year-to-date numbers, it just seems like Fluids the exit rate is going to be at least for the guide maybe just conservative. But just curious it looks like it's going to trend down high single digits or so in the fourth quarter. Is that just comps timing? Like how would you kind of characterize that? First of all is that the right read in terms of guide?

No. It's correct and it's what we've been guiding all year that we grew 17% on the top line Q4 last year that there was no way we were going to do that again, because that 17% growth was timing of shipments in our process solutions group that some of which that we recognized in Q3 so that business will grow year-over-year. It's just a timing issue. And the fact of the matter and in fueling solutions we had a self-induced backlog of our inability to get the product out last year, which we've done a much better job this year. So our revenue growth has been more evenly blended. So it's going to be a difficult comp. I think the headline figure is going to be what it is, but I think that we're confident that we can increase absolute earnings quarter-over-quarter despite that difficult top line comp.

Understood. And then in the context of what looks like a tough comp to start next year there? Or do you expect kind of next year start out slower than ultimately ends just given those comps?

I don’t want to get into providing guidance for next year, and I won’t offer any sequential guidance for that period. Let’s wait until we finish this year, and we can address the seasonality of 2020 then.

Okay, that makes sense. For my second follow-up, could you remind us of the total expected incremental cost savings for 2020? I don't think that number has changed, but I'd like confirmation on that.

You mean the famous $50 million? I knew, we'd finally got a question. Congratulations Pat. Yes, it's $50 million.

So $50 million. I'm aware you don't want to provide guidance for next year, but you mentioned that figure. I'm just wondering if we should consider that weighted to 1.5 of the year compared to the rest.

You can't stop yourself with the seasonality, can you? All right. $50 million is all you've got. Thanks Pat.

Thanks guys.

Hi, good morning guys. Just a follow-up on kind of the core margin conversion this quarter, Rich, and I think in some of the past quarters you tried to isolate what was the self-help, what was kind of the core conversion. Earlier in the year, I think you would've said core conversion could have been better. Obviously, the 60% is a very good all-in number. Just wondering how you kind of grade those different pieces in the quarter.

It's improving and continues to do so as we move forward. If we look past the mixed results and eliminate the extraneous factors from the numbers, we can see an upward trend. Much of this improvement is due to better production performance compared to last year. The reason we stopped breaking it down is that we had committed to doing that for a year, and the SG&A expenses, particularly due to currency fluctuations, have become quite complicated. There are challenges with profit translation that are counterbalanced by core currency costs that positively influence our SG&A. It appears we might be overshooting our SG&A projections. We anticipated this as we observed currency developments throughout the year. Overall, while we're never completely satisfied and are aware of the areas needing improvement for next year, we feel positive about the gross margin conversion and operating conversion.

Got it. That's helpful. And then I know you made mention to it a few times on some of the various moving pieces on revenue timing. Any way to kind of size the totality of the revenue that might have been pulled forward for the fourth quarter? Just for the sake of confusion so no one kind of gets that number wrong?

Yes. As we closed this quarter, we anticipated explaining the Q4 squeeze, especially since we exceeded our internal estimates for Q3 revenue in Fluids, which made the situation more complex. The reality is, particularly regarding process solutions, if the product is ready, we should prioritize getting it out the door to manage the Q4 numbers. Pumps and process solutions, especially Maag, had a strong Q4 last year. We acknowledged this in Q3, and I believe we have navigated the Fluids issue effectively despite the challenging comp we created last year on the aboveground side. Additionally, we performed exceptionally well in Q3 in China, but we do not expect to replicate that performance in Q4 concerning the underground segment.

Got it, that's helpful. And then just one minor one, anything that you saw on more of the pumps side of Fluids that matched some of this kind of macro agita out there? It doesn't really seem like it. But given that it's longer cycle maybe it's not something that's apparent in the numbers?

Yes. I think that the longer-cycle systems business continued to book well for us. I think on the pumps business, we saw some weakening at the end of Q3 going into Q4.

Got it appreciate the color. Good quarter guys.

Thanks good morning guys. So we've talked about the 4Q guide to some extent on the Fluids it implied 4Q organic for Fluids. Maybe just thinking about Refrigeration & Food Equipment, it seems like the flattish guide for the year implies about mid-single-digit growth in 4Q. And so just curious just how much of that you already have in your backlog versus meeting short cycle to get better in order to hit that number.

I would think that we've got the majority of it in backlog.

Okay. All right. Good enough. And then I guess maybe kind of thinking about next year and clearly on the fueling and transport side, you guys have been great regionally but very specifically in China you mentioned an upgrade cycle coming to an end. I guess how do you think about the growth rate in China on the fueling side of the business next year? And is there a headwind that we should be aware of as we're thinking about our own planning for 2020?

Yes. We think that the belowground portion has got a headwind specifically in China because of the runoff of the regulatory environment. We're working on plans to make it up in other regions at the end of the day. But clearly on the underground side, we would expect that to be a headwind going into next year.

Got it. Is your expectation at this point that China overall on the fueling side is still growth next year?

I hope so, but I think it's a little too early to determine the balance between the underground side and the recovery on the aboveground side. So we don't know yet, but that's our current planning.

Got it. Okay. Thanks guys.

Thank you. Good morning everyone. Rich, you've mentioned improved production performance several times during this call, and I would like to understand more about that. What are the specific changes you have made in Fluids compared to last year? Have you implemented automation? Have you removed bottlenecks or streamlined SKUs? Please provide some details on what has changed that supports this description of improved production performance.

I believe that year-to-date 2019, our fluid solutions group has shown the most significant improvement in operations compared to last year. We acknowledged last year that we faced challenges with the planned consolidation in Europe, which needed to be addressed. We also saw potential for improvement in our North American operations, and both areas have shown progress compared to last year. Currently, we are not facing frictional costs and have minimal overtime, reflecting reductions in our working capital in various performance metrics. This improvement has contributed to our year-over-year revenue growth since we had the same backlog last year. This year, we are managing to fulfill it more consistently rather than cramming it into the fourth quarter as we did previously. While the group is making strides in re-platforming, the benefits of that will be realized further down the road.

That's great. And then just as a follow-up on the geographies, I'm trying to figure out which is more impressive, the fact that you had all segments growing in Europe, considering some of the anxiety we've seen in slowing there or China being up 20%. Just start with Europe, the balance of the segment growth there and in terms of recent weakness that we've seen in those geographies.

As I mentioned earlier, we continue to perform well in Europe. And almost inexplicably, I mean, I think I wrote that into our comments despite the bad macros and everything else. But remember too that it is an EMEA comment. It's not necessarily what we would consider the old Western Europe, right? And there are headwinds there. We run through headwinds in both DESTACO and to a certain extent VSG on our auto OEM European auto OEM volume that we've offset and we've made a lot of that up on Printing & ID that are shipping into greater EMEA. So it's not like a lot of that product is being shipped into Germany per se. A lot of it is being shipped into the Middle East and Africa. So overall I think there's some timing differences on VSG. I think that Europe was actually up, off of two previous down quarters. And the balance of it is mostly in the Printing & ID segment and on the pumps on the biopharma side.

And then China, no sign of trade friction fallout?

No. There's all kind of signs of trade friction fallout for sure. But at the end of the day I think that the Fluids group and digital printing offset weakness in pumps I think and MI in Markem-Imaje.

Very helpful. Thank you.

You’re welcome.

Thank you. Good morning. Just wanted to follow up on the China Fluids discussion. Can you help size maybe the benefit that you've had from this pre-buy? I don't know how else to call it but ahead of regulatory changes.

No. I can just tell you that our estimates for Q3, we did better than we would have thought in terms of timing. Whether we can squeeze out some more growth in Q4 remains to be seen. But we consider it to be a headwind going into 2020 just because of the end of the transition. But I can't size it.

I mean we're all wondering about the materiality of that specific business to the segment overall.

No I get it. And it's – the good news for us is that we've got a variety of different – first of all, once we go to the new segment structure you're going to be able to unpack the long cycle portions of Fluids with the short cycle side. So we'll give you a lot more transparency there. So before you start taking the entire larger old segment and putting a total headwind on it of some percentage basis I would caution you, why don't you wait to Q4 and then you're going to see the split between the long cycle and the short cycle.

Okay. And then lastly on ESG, we've seen some pretty good order volatility throughout the year. I think orders were down quite a bit in the first half. Obviously, you made up for it in the third quarter. What's sort of going on here? In terms of timing is there some specific product rollout? Is this just lumpiness from large customers? And what's kind of the setup going forward?

It's the latter, right? So we recognize in that particular business that there are large high-value kind of blanket orders that come in from large customers that you've got to deal with the timing of the runoff. So part of the backlog positivity that we had this quarter is the fact that ESG is beginning to bring in orders for 2020 and that's reflected in our backlog.

Thank you. This concludes our conference call. We thank you for your interest in Dover and look forward to speaking to you next quarter. Have a good day.