Dover Corp (DOV) — Q4 2019 Earnings Call Transcript

Thanks, Nicole. Good morning and welcome to Dover's Fourth Quarter 2019 Earnings Call. This call will be available for playback through February 20, and 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 statement. We undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. With that, I will turn this call over to Rich.

Thanks, Andrey. Good morning, everyone, and thanks for joining us on this morning's conference call. Let's get started on Slide 3 with key highlights for the fourth quarter and the full year of 2019. Q4 revenue declined 1% organically due to a tough revenue comparison with Q4 of 2018 that we've been highlighting throughout the year. Overall, 2019 revenue growth was solid, up 4%, at the high end of our initial annual guidance, as four of our five segments delivered robust growth despite uncertain industrial macro environment in some of our end markets and operating geographies. Bookings in the quarter were approximately flat year-over-year, posting a solid book-to-bill of 1.04. We are encouraged with the strength of our backlog, which stands at 8% higher than at the beginning of 2019 and is up in four out of our five segments, which we'll cover later in the presentation. Despite posting lower revenue, our earnings from continuous operations increased with margins in Q4 expanding 140 basis points, giving us confidence about our margin aspirations in 2020. We are forging ahead with our productivity and margin improvement efforts as outlined in our investor presentation in September. Adjusted Q4 earnings were up 7%, and for the full year, our earnings grew 15%. Adjusted diluted EPS was $1.54 a share for Q4 and $5.93 for the full year, which represents a 19% increase year-over-year. Summing up, 2019 was another year of strong performance for Dover. We delivered industry-leading organic growth rates on the top line, expanded margins materially, improved our cash flow conversion metrics and continued to enhance the quality of the Dover portfolio through organic investments and four bolt-on acquisitions. On the back of a solid order backlog and continued momentum and execution of our margin improvement plans, we are announcing the full year adjusted EPS guidance of $6.20 to $6.40 a share. Let's move on to Slide 4 for more detail on the segment performance. Engineered Products segment had a solid finish to a strong year. Q4 growth was 3% and full year, 5%. Top line grew in the quarter on continued strong demand for our refuse collection vehicles as well as strong double-digit growth in associated software. Our vehicle service business saw improvement in its European and OEM businesses, and we also introduced a new ADAS calibration digital offering, and we are excited about its growth prospects. Our MPG business grew in high single digits as it began shipping against a strong backlog built earlier in the year. Demand in our industrial winch and industrial automation businesses remains subdued due to cyclical weakness in industrial goods and automotive. Segment bookings in the fourth quarter were solid at a book-to-bill of 1.08 and resulting backlog higher than at the beginning of 2019. Our Q4 adjusted segment margin expanded 200 basis points on solid volume, product mix and productivity measures. Fueling Solutions finished strong and delivered a year of exemplary results. Full year growth was broad-based at 11%, and the segment delivered 320 basis point margin improvement, with the aboveground businesses exiting the year well into the target range of 15% to 17% that we had set forth in 2018. Demand remained healthy in Q4, yielding 5% growth for the segment and was particularly strong in North America where EMV compliance demand appears to be gaining momentum. Bookings in the segment were up 11% organically in Q4, providing a solid base for 2020. We have completed the integration of Belanger into our vehicle wash platform, and the business is on pace to meet or exceed our return on invested capital hurdle. Imaging & Identification declined 2% in the quarter and ended the year with 1% organic growth. Marking and coding activity was slow in Asia throughout the year, including in Q4, while other regions performed as expected. As you know, our digital textile printing business can be lumpy on the timing of orders and shipments and impacted by tariffs and financing availability in the Asian textile producing markets. A combination of these factors contributed to a slower Q4 in the textile industry activity, but we continue to work with a solid pipeline of prospective orders. Also, our digital printing workflow software is showing very good momentum with double-digit growth. Backlog for the segment is up 7% year-over-year. This segment expanded margin by 270 basis points in Q4 and by 260 basis points for the full year despite slower top line, exemplifying our commitment to improve productivity, cost control and pricing discipline. Lastly, we recently closed the previously announced acquisition of Systech, a leading provider of traceability and brand protection software solutions primarily to global pharmaceutical manufacturers. This offering fits logically into our marking and coding portfolio and expands the share of software and service revenue within Markem-Imaje to over 15%. We are excited about the prospects of driving growth by expanding this offering into our high-value, fast-moving consumer goods customer portfolio. Pumps and Process Solutions posted an 8% decline as the segment faced a tough comparable in Q4 as a result of Maag shipment timing and witnessed a steady slowing during the quarter in the industrial pump market where distributors were actively managing down inventory levels. Within the biopharma pumping connectors business, revenue continued its strong double-digit growth and carries a very strong backlog into the new year. We expect the biopharma business to continue its double-digit trajectory into 2020. With respect to DPC, our precision components business, activity slowed in what appears to be a temporary lull in the natural gas transportation infrastructure buildout, but we remain confident about its long-term attractiveness. Despite the aforementioned order timing differences, Maag ended the year well and carries a strong backlog into 2020. Summing up, all the businesses in this segment posted organic growth in 2019, yielding a segment growth rate of 4%. The segment delivered an outstanding 310 basis point margin improvement for the full year. The segment is entering 2020 with a backlog that's 12% higher year-over-year, but we expect to get off to a slower start in industrial pumps and DPC in the first half. In Refrigeration & Food Equipment, it's been unmistakably a tough year for the segment with new food retail store construction continuing to lag expectations and negatively impacting our systems and services businesses. This effect is partially offset by strong sales in the case product line that primarily serves store remodels, which continued to expand at a double-digit rate year-over-year, including on revenue, bookings and backlog. We have not stood still during this period with site consolidations in unified brands and factory automation and case set to contribute positively to earnings in 2020. Despite a challenging demand environment in 2019, our can forming and heat exchanger businesses returned to growth in Q4. Belvac's backlog has nearly doubled compared to the start of 2019. Overall, the segment enters 2020 on a positive note with a 19% higher backlog year-over-year. Our operational and productivity initiatives remain on track to start delivering results primarily in the second half of 2020. I'll pass it on to Brad here.

Thanks, Rich. Good morning, everyone. Let's start going through the details on Slide 5. Rich has provided color on the growth dynamics by segment. I will point out that on top of the 1% organic revenue decline, FX continued to be a headwind in Q4, reducing top line by 1% or $20 million. We expect FX headwinds to subside in 2020. Acquisitions and dispositions, principally Belanger and Finder, contributed a $5 million net increase to revenue in the quarter. Bookings were flat organically and were similarly negatively impacted by FX and positively supported by acquisitions. From a geographic perspective, the U.S., our largest market, grew 4% organically for the full year with all businesses, except Refrigeration, posting solid growth. Europe was up 6% where all five segments posted organic growth in 2019. All of Asia grew 2% organically for the full year, while China posted 3% growth. Activity in Asia was mixed across our businesses. Strong regulatory and new build demand in the fueling and plastics and polymer markets were offset in part by slower demand in industrial heat exchangers and marking and coding. Latin America was slightly down for the year with a strong first half and a slower second half. Now to the earnings bridges on Slide 6. Starting at the top. Engineered Products' adjusted segment EBITDA improved $9 million, largely driven by volume and mix, more than offsetting headwinds from FX. Fueling Solutions' growth of $17 million reflects a combination of robust growth, continued margin improvement in retail fueling and in part, the acquisition of Belanger. Imaging & Identification grew $6 million on strong expanded margin despite lower volumes. The $6 million decline at Pumps & Process Solutions was driven by lower comparable volumes and was partially offset by stronger margins. Lastly, the decline of $7 million in Refrigeration & Food Equipment reflects lower volumes in the quarter. Going to the bottom of the chart. Adjusted earnings from continuing operations improved $15 million or 7%, primarily driven by higher segment earnings and lower interest and tax expenses, partially offset by higher corporate costs. The effective tax rate, excluding discrete tax benefits, is approximately 22% for 2019. Discrete tax benefits in the quarter were approximately $0.06 per share. Rightsizing and other costs were $18 million in the quarter or $14 million after tax, providing confidence on further reducing costs and increasing margins in 2020. In the quarter, we also refinanced debt due to mature in 2020 and in 2021, resulting in a $24 million loss on extinguishment or $18 million after tax. This loss is treated as an adjustment item to EPS in the quarter. The refinancing results in approximately $13 million lower interest expense on long-term debt in 2020. Now on Slide 7. We finished the year with very strong cash flow. Free cash flow for the year was $758 million or $140 million over last year, including a $16 million increase in capital expenditures. The free cash flow increase exceeded growth in earnings, reflecting improved working capital discipline and resulting in a more than 500 basis point improvement in cash flow conversion as a percent of adjusted earnings. As a percent of revenue, free cash flow was 10.6% for the year or 11.1% if we exclude cash restructuring expenses, both of which are above the midpoint of our annual guidance of 8% to 12%. Capital expenditures were $187 million for the year, slightly increased compared to last year, but below our original plan. While our major expansion projects remain on pace with our plan, timing of payments related to several large projects will spill over into 2020. Lastly, let's review Slide 8 with the EPS bridge. We finished the year with a strong 19% increase in earnings per share. This was driven by revenue growth conversion as well as margin improvement activities, resulting in revenue conversion margin well in excess of 100%. As you can see on the chart, the strength of the dollar in 2019 resulted in a negative FX impact of approximately $0.13 of EPS, which we do not expect to reoccur in 2020. All in all, we can expect the same dynamic into 2020, a healthy conversion on revenue growth and operational savings, driving year-over-year EPS accretion. With that, I'll turn it back to Rich.

Thanks, Brad. Let's take a look at the outlooks on Slide 9. We're entering the year with encouraging backlog and a constructive demand environment across the majority of our markets, allowing us to forecast organic growth of 2% to 3%, which I'll cover in detail on the next slide. Adjusted EPS is forecasted to be $6.20 to $6.40 a share as a result of solid revenue conversion and our previously announced cost savings initiatives. We expect earnings growth to modestly leverage in the second half due to seasonality and timing of productivity measures. We expect another strong year of cash flow conversion of 85% to 90% of adjusted net earnings despite higher spending on capital investment. Engineered Products is expected to grow 3% to 5% organically on continued strength in waste handling, vehicle services and our aerospace and defense business. Fueling Solution is expected to have a slower 2020 compared to the strong past couple of years as the underground upgrade cycle in China rolls off. EMV activity in the U.S. has picked up, and we expect to gain better visibility in the next couple of quarters about potential upside here. Imaging & ID is expected to grow 2% to 3%, with the outlook largely dependent on conditions in Asia for both marking and coding and textile printing. Pumps and Process Solutions enters the year with a very strong backlog, and we expect it to grow 3% to 5% geared towards the second half. Finally, Refrigeration & Food Equipment is expected to grow modestly in 2020. We are entering the year with a very strong backlog, but the trajectory of the past two years calls for caution early in the year. Overall, our multi-industrial portfolio with a significant share of aftermarket component and service and software revenue is expected to deliver healthy growth in what continues to be an uncertain macro environment. Go to Slide 11. Dover's strategy is simple, but our aspirations are ambitious. We laid out key priorities in 2018 and are tracking very well, delivering against those. We plan to advance the same strategy further in 2020. First, you can see from the result of our rightsizing and operational improvement in our bottom line and our cash flow. We achieved target margin performance in our Fueling business. In 2020, we'll continue with the previously announced $50 million cost reduction program as well as our ongoing footprint and productivity programs in Dover food retail. Coupled with healthy growth in conversion, these actions will continue providing a margin accretion tailwind. Our business has sustained strong growth while taking costs out and working on the productivity, all under uncertain macro conditions. Our top priority in capital deployment is organic reinvestment. We initiated several growth and productivity capital projects and are starting investments in our can forming and heat exchanger businesses to capture growing volumes and upgrade competitive capabilities. Part of our SG&A reduction program was reinvested into various growth, R&D and digital initiatives, and we will continue investing in world-class digital and operational capabilities in 2020. Lastly, we committed to disciplined portfolio-enhancing M&A. Over the last 12 months, we have consummated four bolt-on, high-fit accretive proprietary transactions in the priority areas of our portfolio. The M&A pipeline remains active going into 2020. On a final note, I'd like to address the inevitable coronavirus questions as best I can at this early stage. First and foremost, we have been in regular contact with our in-country employees and have issued policy guidance using our experience from the SARS period. We have also put in appropriate travel policies company-wide. Our production sites had planned to be down from January 24 to 30 for Chinese New Year, but we expect to remain down through February 9 in most sites due to canton-enacted safety measures. In preparation for Chinese New Year, Dover and our supplier network had built inventory to cover this period as normal practice, but we are working closely with our global supply base on potential mitigation strategies actively. I would like to thank everybody at Dover for delivering a strong year and the hard work, setting us up for a good outlook in 2020. And that's it, and I'll hand it over to you, Andrey, for Q&A.

Nicole, let's open the Q&A.

Rich, in RF&E, obviously, strong backlog now leaving 2019. I think you said last quarter that good door and case bookings could give you more confidence that you're at the floor of the system side. So did the bookings plus the return to growth in beverage can and heat exchangers actually mean that you finally have good visibility into organic revenue growth in 2020?

Well, I think on the can forming, for sure. And on the case side of the Refrigeration business, yes. On the systems and service portion, no because that tends to be relatively short cycle and doesn't carry much of a backlog. So I think we feel pretty good about the case door backlog that we have going into the year. I think that we feel good about Belvac, and I think that we feel reasonably good on SWEP on the heat exchangers.

Okay. That's helpful. And then just a follow-up on RF&E margin. You talked about the 15% margin as the exit run rate for 2020. So the good bookings in Q4 gives you a better shot at hitting that run rate? Is it still on track? And the margin in the quarter, obviously, you've talked about labor availability and overtime is an issue. I assume that's what it was again in the quarter, and that mitigates as you get the automation project online.

It wasn't so much the labor issues we faced; those have improved in case door production. If there was any disappointment during the quarter, it was with unified brands. We had the orders ready to ship, but we were in the midst of a plant consolidation, which led to some inconsistent performance. However, I believe we've resolved many of our labor issues in case door as we move toward automation. From what I've observed at the start of this year, the shipment rates for unified brands have been improving, so I think we're on solid ground there as well.

So you do think you could hit mid-teens as you go out to the end of the year here, Rich?

Right, yes. I mean I think that our expectation is to exit at our target margin, Andy.

Just on the automation project itself, Rich. Can you just update us on what happens here in the next quarter or two? So you're starting to run beta and cut over? Where is the stress point on the organization to get this right?

That organization has been under a lot of stress. But in this particular case, we will be building inventory for the transition through the first six months of the year. So I think it's going to be a little challenging from a working capital point of view. We'll be getting the beta units off within next month or so. Our target is to cut over manufacturing on a single product line in approximately June. But as we mentioned before, this automation project is not running inside the existing assembly operations of case door. So we don't expect to have any downtime associated with the start-up. It's just the costs associated with the start-up, including the working capital build.

And just thinking about the profitability in your backlog, right? A lot of that will hinge on the execution in the factory. But as you've tried to streamline the SKU count and the like, do you feel like you have real visibility on the backlog profitability itself? And how much of a part is it to the kind of the exit rate that you're talking about for the year?

I think that we've got better visibility than we have had, I guess, previously. I sell part and parcel to reaching our exit margins is some confidence in terms of what we have in the backlog and the margin that we should generate off of it. So it's not predicated completely on cost reduction as a result of labor content and assembly.

So the 0% to 2% RF&E guidance with SWEP and Belvac returning, and Rich, you mentioned case and door strength. Does that imply that the rest of that business is declining? Is that business improving, or are you just assuming it's still down as it has been? How should we view this?

I think that we need to parse some of the pieces. But if you go back and listen to the transcript, I think that we are being cautious with that segment because the fact of the matter is it needs to demonstrate a couple of quarters of getting its feet under it. But I think that the part that we're going to wait and see mode is the systems and service portion of the portfolio. We're confident that case door should be up year-over-year. We feel good about SWEP and Belvac, and then we'll see.

The 5.4% margin this quarter, if you weren't running these parallel systems and the automation project, can you give me an idea of what that margin might have looked like without these initiatives?

There could be potential, but I don't have the specific details available. We incurred a number of costs during the quarter due to the transitions in UB this time, which we could normalize, but I prefer not to speculate on what our margin would be if certain factors didn't apply. I can't provide an estimate of what we expect for 2020 without revisiting the quarter in detail. We have to accept the current situation. We're not satisfied with our performance, but we believe we have good visibility on the non-Refrigeration segment of our portfolio, and it is our responsibility to improve on the Refrigeration aspect.

That's fair. Just lastly, Rich, I remember a conversation we had where you were pretty adamant, we're not going to chase industrial 'software' deals and pay the big multiple some of these other companies have paid. And now you've done it, what appear to be a couple of pretty nice fit bolt-on software deals, I'm wondering how you're now thinking about this. Have you been able to find a niche of some higher technology, higher value add without overpaying as you look at the portfolio and ramp up M&A going forward?

I believe that software tends to have higher valuations compared to core industrial sectors. My point was that we are not going to pursue software deals without considering their valuations. The software deals we have completed are very complementary to both MI and ESG. I believe we paid a reasonable price, but it's important to note that software generally commands a higher multiple.

Maybe just following up on how you're thinking about the seasonality through the year. I think you had mentioned in Pumps and Process and Refrigeration & Food in particular quite a back-end loaded year. So I just wanted to check if you think Dover as a whole can be in that 2% to 3% organic sales growth range through each quarter and also whether that net $50 million of cost save, we should just spread out evenly through the year.

Let's address the second question first. Yes, regarding the $50 million, spreading it evenly throughout the year seems to be the safest approach. While it's not significantly impactful to the overall earnings, it is important for the year-over-year projected change. I believe it won't disproportionately affect revenue growth, but we need to evaluate our position on industrial pumps in Q1. We anticipate that Maag and DPC will be leveraged due to their larger projects, so there's some caution regarding those two businesses. The upside comes from EMV. Reflecting on Q4, we were somewhat disappointed in demand, having indicated a slowdown in industrial pumps towards the end of Q3. The decline was noticeable in Q4, which was disappointing compared to our forecasts. However, we performed exceptionally well in EMV, allowing us to balance out where we stood. For DF, I believe the earnings will be back-end loaded, rather than the revenue, as we have strong backlogs in Refrigeration.

And just my follow-up on capital deployment. In 2019, if I look at the cash you spent on buyback and M&A and CapEx, each of those three items were in that $150-ish million to $200 million range rounding-wise. Just wondered when you're thinking about 2020, you can see the share count assumption you have pegged, you can see the CapEx range you have provided. But would we be surprised if that spread is broadly similar in 2020 as it was in '19?

I think that the CapEx is our best estimate at this time. I think that we would prefer the weighting towards inorganic investment to go up and capital return to go down. But if we're not spending it on one side, then it's going to come back to the other side.

This is David Ridley-Lane on for Andrew. What gives you confidence around the demand improving Pumps & Process Solutions as you go through 2020? I definitely heard your commentary that could be softer here in the first half.

Our biopharma business, we expect to again grow in double digits. I think that our caution is around industrial pumps. We have good backlogs on a project basis in Maag, so we feel good about that. And then DPC, we're betting on a little bit of return to growth largely in the second half. So I think we've got a glass-half-full scenario. We've got some backlogs on our project-related businesses that to the extent everything remains firm will deliver on those. We're going to be a little cautious on industrial pump demand until we see and interact with our dealers a little about where they stand in their stocking levels and the like. So I think that gives us some confidence that the only risk that we're taking in terms of growth is largely on the industrial pump side.

Got it. And did the tone shift with customers around EMV upgrades? Is there a greater sense of urgency? And any updated thoughts on EMV demand after 2020 would be the question.

Yes, 2020. I guess if we look at Q4, you could make an argument that the phasing of the demand could be pulled into 2020, but we don't have enough data. It allows us to say, let's move that number up in terms of how it extrapolates into revenue. But clearly, what's happening is, as you can read the newspaper, you're getting now the first instances of credit card fraud at retail operations. And once you have that, that kind of jolts a lot of people into action. So I think that's the phenomenon that we see.

So Rich, I just wanted to kind of follow up on the pumps outlook. Obviously, industrial pumps is the area of concern. How much backlog do you have kind of underwritten already for 2020 in that revenue growth outlook that you've got? And how does that compare to a normal backlog build into the fiscal year?

The new segment's backlog is increasing, primarily driven by DPC and Maag, which are project-oriented, so we have some visibility there. However, the industrial sector outside of biopharma is stagnant, and most of the revenue in that area comes through distribution. As I mentioned earlier, we have been managing inventory as we approach Q4. We need to assess our position and complete a quarter to better understand the situation. Therefore, we are cautious about the demand for industrial pumps, although we are optimistic about biopharma and Maag based on the existing backlog.

Okay. That's helpful. It would also be beneficial to have some insight into the current status of distributor and channel inventories. I wanted to discuss CapEx as well, which has exceeded $200 million, accounting for approximately 3% of sales. Generally, you've been operating at 2%, which is consistent with most of your multi-industrial peers. I understand you're focused on internal investment. I'm curious about how long you anticipate CapEx will stay at these levels and when you expect it to decrease.

I think we're still spending on the brand-new site for our biopharma business that is going to roll off. So as Brad mentioned before, we underspent our guidance on CapEx. One of the reasons that we did was I think we underestimated how cold it is in Minneapolis to get that building stood up, so part of the spending has rolled into 2020. That, to me, is a one-timer, and we don't have anything like that. So we really have two or three really big projects running through our CapEx spending now. I think we highlighted them in 2018. Using round figures, in aggregate, that is close to between $90 million and $100 million of CapEx spend. We probably spent 50% to 60% in 2019. We're going to roll forward to 40%. Unless we come up with another project for the brand-new building, based on growth, I would expect that amount of CapEx to come down as a percent of revenue.

Rich, just on Imaging & ID, I think the 2% to 3% seems like it would be similar to what would be in a normal year. I know maybe some persistent weakness in the fourth quarter doesn't give you all the optimism in the world. But you're coming off some fairly easy comps. The business doesn't seem to take a long time to build momentum once generated. At what point in time could we start to see more momentum there? Are we kind of locked into a weak Q1 just based on your visibility? And from there, it becomes more of a macro call? Can you just walk us through the phasing of what a better scenario would look like timing-wise?

It's very Asia dependent. And just forget the recent news around Asia. Asia had slowed progressively in that particular sector. I'm talking about the Printing & ID portion of the business throughout 2019. So I think we're relatively cautious about expectation there, quite frankly, going into '20. We didn't make some deliveries that we thought we were going to make in digital printing in Q4 because of financing, letters of credit and the like. So part and parcel to that growth rate for '20 is somewhat levered onto the textile printing business because we believe that the orders are there. We just need to sort out some of the financing on it. So it's hard to say. I mean I think that's a question that we can probably answer at the end of Q1 once we see what's actually happening in Asia on the printing and ID side to say whether we're going to have an inflection point. Having said that, we've just invested in a complementary revenue stream for Markem-Imaje. So let's see what we can do with that going forward.

Got it. And then just taking a step back, obviously, a lot of focus the last couple of years on productivity, and 2020 certainly has a lot more with some of the investments you're making in CapEx and otherwise. Is 2020 a year where you can start to shift your gaze toward the portfolio, whether on the M&A side or examining maybe noncore pieces of the business? Or is this still going to be kind of an eyes-down, productivity-focused year in its entirety?

I'm sure the management team is not going to like when I say this, but the productivity issue never goes away. So what we're going to grind out in '20 is our expectation to grind down in '21 and going forward. And that's why we're investing quite a bit in our digital efforts and our back-office efforts and a variety of other things. So we're taking the P&L cost of investing in those areas with the expectation that we can grind out the productivity in the following years. So that really doesn't go away. We actually have spent considerable time on our portfolio. It hasn't translated into a lot of inorganic activity, but it's not for a lack of trying.

Just in your Fueling Solutions organic growth guide, how much of a headwind is baked in for China underground subsiding here in 2020?

In percentage terms, I don't recall. I think it was $50 million more or less in terms of absolute revenue.

Okay. All right. Cool. And then specifically on capital deployment, I may have missed this earlier. I know we talked a little about M&A. But how are you guys thinking about the toggle on buyback? And what should we kind of bake in or what is baked into your expectations for 2020?

If we go back to 2018, we stated that we wouldn't just hold onto cash. We prefer to invest it in acquisitions. This year, we purchased a total of $143 million in equity, even though we haven't pursued many acquisitions. In 2020, I would like to see a greater proportion of our investments go towards acquisitions. However, if we can't make efficient investments that yield high returns, you can expect things to remain the same.

Can you just comment on the price-cost environment you're seeing now and then what's being assumed for 2020 and if you're still seeing any impacts from tariffs?

I believe they are currently neutral regarding year-over-year input costs. In the second half of 2019, we noticed a year-over-year benefit in our inputs. Therefore, we anticipate a relatively neutral outlook, and our goal is to ensure that pricing exceeds inflationary inputs, including labor costs.

Got it. And just a quick follow-up. We know you have the $50 million cost reduction target for 2020. If the macro environment were to slow down more than expected, is there any potential for further restructuring? Also, can you provide an estimate of any additional savings that might come from that?

Yes. I think that what we're taking out of the $50 million has nothing to do with the demand cycle. So that $50 million is just core reduction of costs. If the demand cycle were to turn against us, clearly, we would take action on our cost base.

When you guys think about the dynamics around EMV, can you just remind us kind of how that plays out beyond '20? And how do you see that trending in '21 and '22, what we have to keep in mind on that front?

Yes. Our previous estimates were that the peak amount would be 2020 and they would reduce progressively in '21 and '22, more or less about 30% a year. Based on the exit rate that we saw in the fourth quarter, there's an argument to be made that it may be higher in 2020 and '21 because of adoption rates. But look, we only have one quarter of data point to model it. As I mentioned during the presentation, we know that we've got a headwind in China demand on the underground side. We may have a tailwind on EMV, but we'd like to get a quarter under our belt to see how that's progressing.

Okay. Great. And then just on Refrigeration. At what stage do you kind of reevaluate the strategy with kind of trying to operate that business better? Do you feel better about that today or a little more cautious about it given the sluggish performance?

Look, I mean we're committed to intervening on the cost base, and this is the year when it takes place, Steve. So I think that we're going to run it for the year. I think that where we're intervening is where our backlog is strongest. So that gives us some pause for success. There are tertiary pieces of the Refrigeration side that we're taking a look at that are not actively tied to the production of case door. But on the case door side, I think that this is the year that we got to deliver, quite frankly.

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

Thank you, everyone.