Dover Corp (DOV) — Q4 2020 Earnings Call Transcript

Thank you, everyone, and thank you for joining our call. This call will be available for playback through February 18, and the audio portion of this call will be archived on our website for 3 months. Dollar 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. We want to remind everyone that our comments today may contain forward-looking statements that are subject to uncertainties and risks, including the impact of COVID-19 on the global economy and our customers, suppliers, employees, operations, business, liquidity, and cash flow. We caution everyone to be guided in their analysis of Dover by referring to our Form 10-K and Form 10-Q for the first quarter, and 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. And with that, I will turn this call over to Rich.

Thanks, Andrey. Good morning, everyone. Let's begin on Slide 3. Order trends have remained positive across the majority of our portfolio since September, and we had a strong finish to the year. Our year-over-year backlog is up 21% as a result of general recovery trends across the portfolio, a meaningful increase in the CFRE segment backlog, and some recognition from our customers that raw material costs and supply chain constraints are becoming more challenging into 2021, driving preorders in some markets. Revenue at $1.8 billion was flat versus the comparable period. Adjusted segment operating margin at 17.1% was flat despite unfavorable revenue mix during the quarter. For the full year, revenue was down 6% and adjusted segment margin up to 16.7% as a result of structural cost savings, center-led strategic initiatives, and tight cost controls offsetting the impact of fixed costs under absorption. As we discussed at length in Q3, we are driving towards a strong cash flow performance in the fourth quarter, and we got it, with full year free cash flow increasing 24% over 2019, achieving 14% of revenue. This is what we would expect to happen as we liquidate working capital in excess of lost profits impact, and as a result of efficiency gains from our back-office consolidation program. With that backdrop, we look into 2021 with conservative optimism. Our order book is solid, albeit with a different mix as compared to last year, with DFRE having a material positive impact on the top and bottom line in '21. We are executing on many initiatives other than structural cost takeout that are expected to deliver margin improvements, which I'll cover later in the presentation. With that, we are initiating full-year guidance of 5% to 6% organic revenue growth and adjusted EPS of $6.25 to $6.45. I'll not spend a lot of time on Slide 4, which is a more detailed overview of the results of the quarter. So let's move to Slide 5. Engineered Products revenue declined on lower shipments in CapEx levered markets such as industrial winches, waste handling equipment, and vehicle services. ESG had a tough Q4 comparable to overcome and VSG was coming off a strong Q3, so the performance was largely expected; both have strong backlogs into 2021. The Aerospace & Defense business had a strong quarter that ended a record year for the business, and demand in industrial automation has shown robust recovery, contributing to our backlog as global auto sequentially ramps production. In Fueling Solutions, as we discussed at the end of Q3, the comparable benchmark for Q4 was tough. Despite the top-line pressure, the segment posted another quarter of strong margin performance on lower volume as our productivity actions remain durable. We are beginning to see the mix benefits from our Helix and Anthem dispenser products, which we believe are winning in the marketplace. We completed the acquisition of Innovation Control Systems in the fourth quarter, which is a great addition to our vehicle launch platform. ICS is a leading supplier of access, payment, and site management solutions and software, which fits into our strategy of driving long-term value from the large installed base of retail fuel sites, which we presented in October. Sales in Imaging & Identification declined 3% organically, the core market within the coating business grew on continued healthy demand for consumables and improvement in demand for principal equipment, with particularly healthy activity in the United States. Digital textile printing CapEx remains slow, but we began seeing recovery in demand for consumables and small format machines, which are likely harbingers of conditions normalizing in 2021. Imaging & Identification is our highest gross margin segment. The marketing and coating business has delivered commendable margin performance this year, holding the profit line virtually unchanged. However, decrementals and textile printing on lower volumes weighed on the segment margins in Q4, and during the full year, we expect this to begin reversing progressively into 2021. Pumps & Process Solutions returned to the top line in the fourth quarter on strong growth in biopharma, medical, and hygienic applications. We also began seeing cyclical recovery in industrial pumps, which posted growth after several soft quarters. Compression components in aftermarket continued to be slow, but recent trends in natural gas and LNG markets give us grounds for optimism going forward. The fourth quarter closed off a solid margin performance in this segment, with margins expanding 150 basis points in Q4 and 220 basis points for the full year. This was driven by broad-based productivity efforts, cost controls, favorable mix, and well-timed capacity expansion in biopharma and medical, which we highlighted earlier in the year. Refrigeration & Food Equipment posted 13% organic growth, with all businesses except Food Service Equipment delivering the increase. A significant portion of the growth came from the well-advertised strength in can making. We are also very encouraged by activity in the core food retail market, which grew organic top line at high single digits in the quarter, driven by the continued strength in the door case product line, where we saw double-digit growth for the full year. The heat exchanger business grew on robust demand in heat pumps and residential applications as well as refrigerated transport and industrial applications like semiconductors and data centers. Margin performance effectively improved, supported by volume and actions we took in the middle of 2020. Absolute earnings increased 71% in the quarter over the comparable period. This margin before, coupled with the upcoming ramp-up of automated case line and food retail, positions us to deliver material margin expansion in 2021.

Thanks, Rich. Good morning, everyone. Let's go to Slide 6. At the top is the revenue bridge. Our top line continued to recover, showing sequential improvement in organic revenue compared to Q3. Several of our businesses, including short-cycle industrial pumps and heat exchanges, experienced positive growth during the quarter, while biopharma, aerospace and defense, marketing and coding, food retail, and can making sustained their positive growth trends from previous quarters. Foreign exchange contributed 2% or $34 million to the top line, primarily due to the euro strengthening against the dollar. Acquisitions outweighed the impact of dispositions in the quarter by $12 million, and we anticipate this number will increase in future quarters. The revenue breakdown by geography shows sequential improvement in each major area, except for Asia. The U.S., our largest market, reported a 1% organic decline in the quarter, which is an improvement from the 4% decline in Q3 due to progressively improving order rates and a strong performance in biopharma, marking coding, food retail, and can making, among others. Europe saw an organic decline of 3%, attributed to retail fueling and a challenging comparison from the previous quarter in vehicle services, although this was partially offset by continued strength in several of our Pumps & Process Solutions businesses. Overall, Asia was down 11% organically, mainly due to China, which experienced a 16% organic decline. This result in China was anticipated as we continue to confront challenges in retail fueling following the expiration of the underground equipment replacement mandate. Moving to the bottom of the page, bookings increased by 2% organically, showing the ongoing momentum across our businesses. In the quarter, we experienced organic growth in four out of our five segments. The fifth segment, fueling solutions, encountered challenging comparisons to the prior year, as previously mentioned. Overall, our backlog rose by approximately $300 million, or 21% compared to last year, which sets us up well as we enter 2021. Let’s review the earnings bridges on Slide 7. We posted better sequential results this quarter following a notable decline in Q2 and a recovery in Q3. In the top chart, adjusted segment EBIT and margin remained roughly unchanged year-over-year as ongoing productivity initiatives balanced out negative organic growth and the dilutive effect of foreign exchange on margins. Turning to the bottom chart, adjusted net earnings decreased by $1 million as increased taxes and corporate expenses offset the rise in segment EBIT. The effective tax rate, excluding one-time tax benefits, was about 21.4% for the year compared to 21.5% the previous year. One-time tax benefits were $8 million for the quarter and $22 million for the year, roughly $4 million lower than in 2019. As we approach 2021, excluding the effects of one-time taxes, we anticipate the effective tax rate will remain nearly the same as 2020, around 21.5%. Costs related to rightsizing and other expenses were $21 million this quarter, or $17 million after tax, pertaining to several new permanent cost savings initiatives and other measures we implemented at the end of 2020. Now on Slide 8. We are pleased with the cash performance in 2020, with full year free cash flow of $939 million, a $181 million or 24% increase over last year. Free cash flow conversion stands at 21% of revenue for the fourth quarter, historically our highest cash flow quarter, and 14% for the full year, a significant increase over the prior year. The call of last quarter's earnings call, we decided to prioritize prudent working capital management over fixed cost absorption to close out the year, and you can see the value delivered in our year-over-year working capital comparison. We have strong revenue visibility into Q1 and confidence in our team's ability to match industrial production with improved customer demand. With that, I'll turn it back to Rich.

Okay. Thanks, Brad. I'm on Page 9. Let me take a few moments to give you an update on our center-led initiatives that we outlined in our strategic plan in September of 2019. While we could have not expected what transpired in 2020, we posited at the time that our portfolio had through-cycle durability and that there were opportunities to drive synergies from our diverse portfolio to improve profitability over time. Despite this, we often hear a notion that Dover is a cost-out story, likely because we give measurable structural cost saving goals each year, implying a finite nature to such endeavor. There's a lot more than cost reductions to our improvement journey, and we continue to reinvest a portion of the savings, so we'll give you a short update on where we are on these strategic initiatives. True in 2019, we began with the rightsizing of our SG&A base after a significant portfolio change. This was necessary and required immediate intervention. Since then, the improvements have been driven by steady productivity and structural cost actions by our operating units and from our investments in 4 core enterprise capabilities that generate very attractive return on investment and can be leveraged across the portfolio. The investments are substantial. By the end of this coming year, the headcount involved in those center-led enterprise capabilities will have increased by over 50%. These are transformational initiatives touching every corner of our global portfolio and delivering real results that you can see in our bottom line, and there is significant runway to drive value. We are investing in the following 4 enterprise capabilities, and I'll highlight a few results, but I would encourage you to review the stats in the slides. First, Dover Digital on Slide 10. This work began in 2017 and accelerated in 2018 with the opening of our Dover Digital Center in Boston. We have over 100 e-commerce connected product and software experts dedicated to this effort. This team helps our business leverage e-commerce at scale and improve the customer journey with ease of doing business, as well as back-end efficiency for sales and order entry. For example, this year, we target to reach a run rate of $1 billion of revenue processed through digital channels, much of which is service parts and catalog items compared to $100 million in 2019. This team also helps our business connect their products and enhance their offerings, which we'll progressively highlight in future presentations as we did for fuel solutions recently. This is a multiyear value creation journey, and we are very excited about what lies ahead for our digital team. Moving to Slide 11. Our Operations Center of Excellence is a central team of domain knowledge experts that delivers health and safety, supply chain management, lean operations, and advanced manufacturing and automation. This team is instrumental in driving value through rooftop consolidation and automation projects. As you know, we have a number of these in the works. We are also excited about the results of the early lean initiatives spearheading. This is another multiyear journey that we will continue to deliver results. Moving on to Slide 12 is our central back-office system, which we call Dover Business Services. We've been at this for several years, and we're still in the early innings of expanding the scale and scope of this capability. By centralizing and offshoring transactional back office facilities, we multiply efficiency through scale, technology leverage, and unit cost arbitrage. DBS is and will remain an integral part of our margin enhancement story. And lastly, moving to Slide 3, the India innovation center is a more than 600-person strong team that our operating companies can leverage for product engineering, digital solutions development, data information management, research and development, and intellectual property services. The scale and expertise of this team allows our operating companies to tap into resources that would have been unaffordable to them as stand-alone companies. And it allows for concurrent engineering on time-sensitive projects. So let's sum this up on Slide 14. We laid out 4 pillars of our strategy in 2019 and have been delivering through cycles. We have maintained our focus on margin improvement and continue to invest despite the economic difficulties of 2020. Our end-market exposures, coupled with the strategic R&D investments we are delivering, create an attractive growth profile. We are committed to reinvesting in our businesses as a top priority and capital allocation to maintain competitiveness, fuel growth, and improve productivity. We are making good strides on the inorganic front. Finally, we're staying disciplined in our capital allocation by returning excess capital to our shareholders via growing dividends and share repurchases. Moving to 15, where does this leave us going into 2021? We believe that our playbook offers us a significant runway to continue delivering attractive through-cycle returns through mid-single-digit top line growth, steady margin expansion, healthy cash conversion, and disciplined capital allocation and a shareholder-friendly capital return posture. Okay. I'll step off the soapbox, and let's move on to 16. We expect demand in engineered products to rebound in 2021. We have seen strong bookings recently in vehicle services and industrial automation, with relevant automotive and vehicle usage statistics trending in the right direction. Bookings have also improved to retain in waste handling, and we are nearly fully booked for the first quarter. Municipal demand will remain uncertain, but we see strong trends in the parts and digital business. As we previewed in November, we expect fueling solutions to have a modest organic growth year. There is known headwind from EMV roll-off in the U.S., but there are a number of positives. We are encouraged by the prospects of our new Anthem user interface solution offering. We expect robust growth in our systems and software business, where we will be launching the industry-first cloud platform developed. We also see good setup for vehicle wash and are excited about having ICs in our portfolio. We expect Imaging & Identification to perform well this year. Marketing & Coding saw a limited downside in 2020, and we've been on a good trajectory in recent quarters despite the tough comp in Q1 due to COVID-driven consumable stocking. This further improvement in services travel restriction subside, and activity and serialization software is also firming up. The biggest factor in this segment is, of course, the digital textile printing unit. Our initial read is for recovery to take place in the second half of the year, as printers will be ramping up production for 2020 apparel collections. Pumps & Process Solutions is expected to have another solid year. We expect robust growth in biopharma and hygienic applications, and the continued recovery trend in industrial pumps, plastics, and polymers is expected to deliver steady performance with a comparable basis to the second half bias to the second half. Precision components are likely to experience a slower start to the year, and we're still comping versus last year's first quarter, which saw robust upstream and downstream activity. And finally, we expect a very strong year in Refrigeration & Food Equipment. The core food retail business is operating with a strong backlog, and the order trajectory has been healthy in the last few quarters. We expect retailers that have paused their remodel programs last year amidst the pandemic to restart these strategic initiatives, and we are well positioned to participate in that activity. Additionally, we see a good outlook for natural refrigerant systems, both in Europe and also in the U.S. California was the first state to mandate the transition to natural refrigerant systems. We were the pioneers in the space, and we are very well positioned to capitalize on the sustainability trend in the industry. Belvac, as you know, is working through a record backlog and is booked for the year. Our heat exchanger business also exited 2020 with a record backlog and a constructive order trajectory across multiple verticals. This will result in material margin improvement in this segment on the back of the case production automation project, higher volumes, and positive business mix. We've covered most of the items on the earlier slides, but I summarize them here in this slide for your reference. As usual, before I wrap up, I'd like to thank everyone at Dover for their work and continued perseverance during this last year. The Dover team has delivered strong results in difficult conditions. I commend all of our employees for doing their part. And Andrey, with that, let's move on to Q&A.

A lot of good additional information there. But just let me dig into like a couple of things, if I could, Rich. First, interesting what you said about kind of preordering. Are you able to fully protect yourself with price and hedging and other things on that type of activity that you're seeing from your customers?

Yes. We have a few challenges as we head into Q1. Raw material prices are increasing, and logistics are quite constrained right now. This trend has been happening since the fourth quarter and seems to be tightening further as economic activity rises. The downside is that we'll need to manage these constraints and proactively address raw material costs, either through pricing or productivity. Regarding the backlog, it is impacting demand because customers are realizing they need to place orders sooner due to these constraints; we can see this reflected in the automotive sector as well. However, this isn't necessarily negative for us, as it could encourage customers to order ahead of rising raw material costs. We have ways to address this, and it’s a relatively quick cycle overall. The positive aspect is that as our backlogs increase through our planning processes, we can manage production more effectively, enhancing efficiency on the factory floor. While there may be some challenges in Q1, I believe they are manageable.

Right. Moving on to the DFRE, it seems you have the volumes necessary to fully engage in the automation projects. While I understand you may not want to discuss margins by segment, could you provide some insight on how the margins are expected to develop in that business? Aside from the usual seasonal peak, is there anything else that might impact the margin trajectory?

No. I would expect that the margins to comp well every quarter, but the seasonality of those margins to remain intact.

I think with the lots of buzzwords, Rich, not used to you kind of like topping at that high level about corporate strategy. But I think the message is that there's something like a little bit more sustainable than just like a couple of years of cost cuts than noticeable to me was the 25% to 35% incremental margin guide. And then the 11% to 13% of revenue in free cash flow in a year where I'll be growing pretty strongly. So basically, you should see some headwind. It shouldn't be like a great cash year, for example. I think, back in 2019, in the fall, you said 25% to 30% incrementals and 8% to 12% free cash as a percentage of sales. Are these kind of like sustainable step-ups that you'd hope to deliver over time as part of the earnings and cash algorithm?

Yes. Look, at the end of the day, we expect to be pulling on both levers, consistent margin expansion, and cash flow productivity. So productivity and the working capital item. Bottom line is, as we've been saying all year, we would expect that with the headwind that we'd be liquidating our balance sheet as we should in a difficult environment on the revenue side. We will have a working capital build because we've got a pretty robust revenue forecast going into '21. But do I think it's going to make our metrics worse? Not demonstrably so because I think we're going to get the benefit of the margin expansion. And I don't expect to deteriorate at all in terms of working capital as a percent of sales.

I look at the 11% to 13% of revenues and it's not that your CapEx is exceeding what I expected. Is the $175 million to $200 million now a sustainable run rate, or did you move some projects from 2020 to 2021? I understand you're planning for that to decrease somewhat due to temporary projects. What is the outlook for CapEx in the next couple of years?

Yes, we have two new transformational projects in progress, one in our Vehicle Services group and another in ESG. While these projects aren't as large as the new building we completed at CPC or the one at DFR, they are based on the same principles. We are automating processes that are currently quite manual. We anticipate a relatively quick return on investment in terms of margin expansion. Since it's early in the year, we've typically projected a higher capital expenditure figure than what we ultimately deliver. Given that we have two significant projects underway, the current figure seems reasonable. However, I don't want to lower the estimate or suggest it's an anomaly, though past experience might indicate that it could be slightly high.

Right. But I mean, if you do 11% to 13% of revenue, even with that, it's not that bad. Just one quick one. You guys had talked about, I think, $25 million of temporary cost reversals as a headwind in can you just give us an update on that number, if there's anything that's coming back relative to what you did last year to protect the margins?

There's nothing I look at specifically. At the end of the day, we will be building. We have estimates for reinstating some incentive compensation and various other factors. However, it's all factored into the EPS forecast we have. Regardless of the pullback, let me answer this way: we had coverage on furloughs, which was a positive this year as it deferred the costs associated with those employees to some extent. What we will reinstate will be accounted for in industrial production on the revenue side. So overall, it balances out. We are discussing general SG&A, and the significant changes were in travel and entertainment as well as incentive compensation. Let's remain optimistic; as incentive compensation returns, I believe travel and entertainment will also rebound. But will it return to 2019 levels? No.

Rich, with the understanding that we don't want to get too far ahead of ourselves in R and FE with the backlog that you have in the core food retail business picking up as well as the bell back deliveries ramping up, would you actually say that high single-digit forecast for '21 could even be conservative given the double-digit momentum that you saw in Q4?

It's a little bit early to.

I said we don't want to get ahead of ourselves.

Let's be cautious as we assess the situation. The backlog appears to be a promising indicator for achieving the additional margins we aim for in this segment. We expect it to be the fastest-growing segment in our current forecasts. I would need to review the specifics, but it significantly contributes to our EPS growth. If the trend holds, considering that refrigeration is a relatively short-cycle business—unlike Belvac, which is booked for the year—we may face delays in fulfilling more callback orders into 2022. For DFR, we are covered for Q1 and are starting to secure coverage for Q2. Let's complete Q1 before adjusting our numbers. Much of the profit increase reflected in our EPS is attributed to this segment. It's worth noting that the conversion rate may not seem overly aggressive because this is one of our lower-margin businesses, which could slightly lower the overall conversion rate. However, we are more focused on absolute profits.

Very helpful. And then just in Engineered products, maybe just give us a little more color into what happened in the quarter in Q4? I know you said it was expected to decline. Did you see any inflationary pressure in that segment in the quarter? And how are you thinking about the margin in that segment in '21?

It's not inflation. If you look back at Q3, the team in VSG did an excellent job handling a backlog that had accumulated during the quarter. Their production performance was very strong and contributed positively to Q4 from a comparable perspective. So that's not an issue. The weaker part of the market we've mentioned throughout the year is municipal, which usually sees deliveries at the end of the year, leading to a challenging comparison. Nevertheless, that segment is primarily associated with our industrial businesses, where we face raw material challenges. We'll need to manage that through a balance of volume, price, and productivity. However, we fully anticipate being able to offset all raw material difficulties across our portfolio.

If the economy were to really pick up starting, say, in the second half as let's present vaccine rollout is successful. Are you geared to handle what could be a material upsurge in demand? Or would you have to like we have to kind of come up with a plan to sort of debottleneck or expand capacity or bring a bunch of people back? How would that work?

The only area that we've got a real capacity constraint would be in a niche business like Belvac. The balance of the portfolio does not run on even 5-day, 3-shift operations, quite frankly; for the middle part, we're a 6-day-a-week single shift group here. So to the extent that we have some amount of visibility, and to the extent that as economic activity ramps, that the supply chain keeps up with it, which it isn't right now, I don't think that we are capacity constrained in any meaningful thing. Having said that, I mean, in terms of top line growth, I think that we are expecting economic activity to kind of sequentially ramp through '21 even in our forecast. But are we capacity constrained outside of some of our niche businesses? No.

That's fair. You just mentioned supply chain, by the way. Are you at a point where you're trying to circumvent this? Or are you letting it run to see how it happens? Meaning, I don't know, possibly seek other suppliers, dual sourcing, that sort of thing? Or is it still sort of too early to tell?

No, no. We're doing everything under our power to get beyond this because whether that is buying raw materials forward in terms of the increase in curve on plates, sheet metal, or something like that, which we're doing. We've been giving guidance to all of our operating companies that, from a working capital perspective, if they need to build at the beginning of the year and bleed it off in the second half of the year, we take the production performance and the efficiency of that rather than getting it to stop/start kind of scenario. And then there are certain a lot of the pinch points forget kind of logistics with container freight and everything else, some of the pinch points on electronic components. We're fighting it out with everybody else.

Can you give us a little bit more color on retail fueling in China? And just are we still decelerating? Are we kind of at a new normal demand level?

All right. Yes, that works. Thanks, Andrey. I believe this will be the last challenging comparison for us, which was related to the double-wall issue. However, the volume we are observing, especially regarding NOx in China, has been quite low. We recently had a significant discussion about whether the volume is genuinely down, and we are missing opportunities, or if the volume has just decreased. We have reached out to all our traditional customers in China, and we still perform well in terms of purchasing programs. I suspect that, for some reason, 2020 saw a downturn in the NOC development of their retail operations. It’s too early to determine if that will recover, and this isn't fully reflected in our forecast for 2021. Nevertheless, it will need to recover at some point.

Okay. Fair enough. And then just as a follow-up, I mean, you talked a little about inventories, but it's hard to say, just given the diversity of your businesses, of course, but are inventories back to normal, you would say, at the customer level, as we've heard lower-term line inventories for several quarters now, so was back to normal in on double ordering?

It really depends, Scott answers. We have businesses like our industrial pumps division that sells through stocking distributors. Our early observations in January indicate that there is some restocking happening, as our backlogs in the industrial sector are increasing, similar to what we’re seeing in material handling. So, it’s reasonable to say that everyone is being cautious with inventories on the distribution side. In 2020, there were two main considerations. First, what will economic activity look like in 2021? Second, if there will be supply constraints as everyone increases their output, should I place my orders now since there’s a chance that some deliveries may be delayed beyond the quarter? So, we have these two dynamics at play. Do I believe they are significantly understocked? No. However, generally speaking, our stocking distributors will order based on their revenue expectations, which is reflected in our forecast.

Maybe just a first question around any margin color by segment you can give. I see the $25 million to $35 million guide firm ahead of incremental margins. Any segments to call out being extremes of that spectrum? And maybe just to find a point, in DFS, should we expect operating margins to grow this year? Or that might be a challenge because of the EMV mix headwind?

There is variability in terms of incremental margin, except for Engineered products, which will be slightly lower. The reason for this is the gross margin in that segment. Although DFRE has lower gross margins at the segment level, the revenue growth there is significant enough to create a considerable absorption benefit year-over-year. Additionally, we are experiencing structural cost savings that vary by segment. Regarding DFS, it's a relatively low growth environment, and the mix is somewhat negative, but we believe we can compensate for that with product 3. Therefore, the hierarchy will be that Engineered products are the lowest, with varied performance across the rest of the portfolio.

Great. Then see the full year guide across the firm. Just wondered perhaps the first quarter, maybe just talk about orders and bookings in recent weeks? And should we expect the first quarter to look maybe a little better than Q4 in terms of year-on-year revenue and margin, but not substantially different until Q2?

I think the answer is yes, but that is a calculation that I have not done around here. I can just tell you that what you would expect is the toughest comp is Q1 to Q1 just because it's pre-pandemic to entering into '21, but we expect it to be better vis-à-vis Q1. Clearly, Q2 comp is going to be a relatively low bar to hurdle, and then the back end of the year is going to be as we mentioned during the color on the segments that we have certain businesses that we believe are back-end loaded, either because of seasonality or based on where they are in the recovery of those markets. So we expect to be better in Q1; everybody is going to be better in Q2, and then regular seasonality from there.

Just a question. You're definitely sort of starting to find all cylinders when it comes to operational storage is starting to deliver consistently on the operational algorithm. But can you just talk about how is your strategy on capital allocation, and, specifically, M&A is evolving going forward? And what kind of opportunities should we be thinking for 2021? And well, how it in terms of availability?

I think that the hierarchy, we've been over a variety of different times, so that's unchanged. I think in terms of opportunity, there's plenty out there, and a lot of it is very expensive for all the reasons that we've talked about. We're on the front foot, actually spent more if you go, I don't know the slide number was; we spent more in '20 versus '19.

That's exactly right.

Right. Yes. We tried to spend a lot more than that, quite frankly, but couldn't get it done because of valuation or a variety of different things. So look, I'm very confident in, as you described it, the operational algorithm here. I think that this is just a roll forward of what we've done for the last couple of years. So our confidence of converting revenue into incremental margin is quite high. I think we have a lot of businesses that have earned the right to grow inorganically. We just got to find the targets and execute on them without getting crazy.

Got you. And just a follow-up, I think John has asked you about the supply chain. But how has your thinking about the supply chain has evolved throughout the COVID sort of pandemic? You manage it very well, but anything different that you guys are going to do going forward in terms of where you're sourcing? And I know it's at extension of John's question, but maybe more color.

Our supply chains are quite distinct, and the decisions we make are influenced by geopolitics and foreign currency fluctuations. We're continually adapting our approach. The trend of purchasing low-value materials with high commodity price exposure from Asia and returning them to the U.S. has been declining for a couple of years. This is partly why we are investing in VSG and ESG, as we believe it will enhance our competitiveness and allow us to better manage production ourselves. While we are not making drastic strategic moves, we are always looking to adapt our supply chain.

On maybe following on that last question, your comments around being front-footed on M&A. Maybe just the flip side of that argument, given where valuation levels are right now, you could argue maybe there hasn't been a better time to looking at the portfolio closer in terms of maybe unlocking value on assets that you don't expect to be part of the portfolio longer term. So maybe just some thoughts on that, and how you're thinking about that specifically for 2021?

Joe, it hasn't changed. We are continuously reviewing various aspects of our portfolio. That's about all I can share at this moment. While we may have opinions on specific assets, our priority is to maximize the value we can derive from what we currently have. I spend significant time on portfolio construction, focusing on both the assets we keep and those we might divest. We evaluate all our businesses based on their participation strategies, market changes, and other factors, rather than solely on current valuation levels. Our approach is more about assessing the hierarchy of return on invested capital and whether an asset has structural advantages or disadvantages over the near term.

Yes. That makes sense, and I don't mean this to be a perfect segue, but I did want to talk about food retail to some degree. You talked last quarter about the fact that margins have gotten back to the low teens, remodeling had restored. I guess, how do we take the comments around the backlog and whether that backlog is building because it's been potentially more difficult to continue on the remodeling at this point given the current coronavirus cases surging? Just want to get a better understanding for whether you're getting on-premise access. And then secondly, how the margins have kind of even trended given being on the third quarter for the food retail business?

We are anticipating significant growth in the retail food sector this year. The backlog built up due to postponements caused by COVID-19 and other factors is now evident as we move into 2021. Additionally, the industry has experienced a long cycle of about 4.5 to 5 years without sufficient replacement or maintenance spending in food retail, leading to pent-up demand. We believe our product is more competitive now, and we are working on improving its cost structure. Customers value having access to products when they need them, and as we adjust our lead times, we are witnessing a positive shift in our backlog. The management team has dedicated 2.5 years to transforming this business, and we expect a significant increase in profitability that will impact our earnings per share this year.

We have covered a lot of ground already. So I really want to talk about the sort of the frame of FY '21 you have laid out. And what struck me was your revenue growth range of 5% to 6% is quite tight and it implies good visibility, maybe some uncertainties. That's a good sort of a question. And the second is your range for margins, 25% to 35%, is quite a bit wider than we normally see. So we normally see more precision on margins and that's revenues in your vice versa. So I wonder if you could maybe point on that. And the width of the margin range, is that a function of portfolio mix primarily? Or is there just some insertion of the raw material? Any color there would be helpful?

Yes, Nigel. I expect that we will gradually tighten those changes as the year progresses. You’re right; we are forecasting organic revenue without that mix, but the margin does involve foreign exchange. We anticipate foreign exchange changes 12 months in advance and also consider mix across a diverse portfolio when looking at gross margin. Therefore, we need some flexibility there. The positive aspect is that refrigeration is recovering, and it will significantly contribute to our overall profits. However, this may not greatly enhance our consolidated conversion margin due to the EBIT margin of that specific business. Reflecting on the earlier question, there is potential for revenue to be higher, and we might be underestimating refrigeration for the year. Ideally, that means an increase in top-line revenue, although it may reduce the conversion margin. Nonetheless, we welcome the increase in absolute profit. This is our current estimate. At the beginning of the year, we prefer to leave ourselves some room for adjustments. Historically, we've aimed to reach our targets, and we fully intend to continue doing that.

And then my follow-on is really the comment around the pre-buy in PRAs or preordering because of supply chain constraints, which makes total sense, and we're certainly hearing about supply chain constraints. But are you getting this feedback from customers? Is it your gut instinct telling you that this is happening? And therefore, should we expect there to be maybe a moderation in order rates in 1Q sort of as a consequence of that 4Q dynamic?

It’s my instinct that we have a meeting of our operating company presidents shortly after this question, and that’s one of the topics we’ll discuss. Based on our internal operations and the guidance for those operations, if you notice supply constraints, it’s wise to take proactive measures and start purchasing components even if it affects working capital, because we can manage that through the rest of the year. We want to avoid missing out on deliveries and production performance. If we’re taking these steps, I expect others are as well. I don’t think this will negatively impact order rates for the rest of the year. There will always be some volatility from quarter to quarter, but our revenue forecast reflects expected shipments. If you have a backlog that exceeds your first-quarter production capacity, it likely won’t be fulfilled anyway. The positive takeaway from my previous response to Sprague is that a larger backlog should enable us to operate our factories more efficiently, which benefits margins.

Would be interested in hearing what the dynamics are around that natural refrigerant, Rich, that you called out. Can your equipment be used for that? Does it have to be retrofit? And how do you think this trend develops from here?

Well, we did a press release on it not too long ago. So you can see our view based on what the ruling for California was. We are a leader in the systems business in Europe, and Europe is probably 3 to 5 years ahead of the United States. So we have the technology. It's now going to be a question of what the adoption rates and where they are regulatory mandated or individual retail operations want to, as part of ESG, to go green and begin adapting those solutions. So we feel really good about our position in terms of having the technology readily available.

Got it. And then just a second question unrelated. If the new administration is part of the stimulus program puts through some restrictions about buy American products, how is Dover's position just broadly if that restriction comes through?

I don't think it would be materially beneficial. Generally speaking, we've made and ship in the jurisdiction that we operate in as an overall comment.

Could you be flexible in terms of your supply chain in terms of doing some sub as kind of lays in the U.S. to qualify? Just the last time just went through, that's what we saw companies were speaking on the on-side.

I believe that if we were a large, vertically integrated company, there would be more challenges. However, we don't plan to bring in assembled products on a large scale that can be broken down in containers for added value. From my past experience, I don't think this will significantly impact us. The only potential opportunity I see is if we were a component part supplier and someone wanted to source in the United States after previously importing. But honestly, I have no idea how to scale that right now.