Dover Corp (DOV) — Q2 2021 Earnings Call Transcript

Thank you, Crystal. Good morning, everyone and thank you for joining our call. This call will be available on our website for playback through August 3rd, and the audio portion will be archived 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 will include forward-looking statements that are subject to uncertainties and risks. We caution everyone to be guided in their analysis of Dover by referring to our Form 10-K and our most recent Form 10-Q 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 will turn this call over to Rich.

Thanks, Andrey. Good morning, everyone. Our second quarter results were strong across the board, and we are particularly pleased with our top-line performance given the complex operating environment. Demand during the quarter was robust, continuing the momentum from the first quarter. Even with a 30% organic top-line growth, we ended Q2 with a higher order backlog. I want to emphasize what we see as an undervalued aspect of our portfolio, which is its organic growth potential. Our revenue in the second quarter exceeded that of the comparable pre-pandemic quarter in 2019, resulting in the highest revenue for the first half of the year in recent Dover history. This indicates that most of our markets are not just recovering but are in a growth environment. New order bookings remained strong, with all segments achieving a book-to-bill ratio above one, leading to sequential growth in the backlog. Our operating margin conversion was solid due to strong execution at the operating level with a healthy mix of products delivered in the quarter. However, the operating environment remains very challenging. It has been 90 days since we last discussed the duration of transitory inflation. As we noted after the first quarter, we had insight into the raw materials cost trajectory as we entered the year, which allowed us to manage pricing effectively. We also provided our operating companies some flexibility regarding working capital decisions to build inventories based on backlog trends. What we did not anticipate was the total cost impact stemming from a strained logistics system and a tight labor market showing no signs of improvement. This has two main effects on our results: first, the costs of inbound and outbound freight were significantly higher; second, the costs related to production line stoppages due to labor and component shortages led to uncertainty and overall supply chain tightness. I will discuss market dynamics and supply chain impacts by business later in the presentation, but I am concerned about the idea that the current economy requires further stimulation and the potential consequences of that perspective. Our teams have done commendably in navigating these difficult conditions, continuing to ship products while achieving strong margin conversion and cash flow. Overall, we believe our operating model provides an advantage, as we primarily produce locally and do not heavily depend on extended supply chains. This is clearly evident in our top-line performance for the quarter. As we look ahead to the second half of the year, our order backlogs instill confidence in our top-line trajectory. Our forecasts do not reflect significant changes in the operating challenges we faced in the first half. We will need to adapt and collaborate with our suppliers and customers to navigate current conditions. We are raising our annual revenue growth guidance to 15% to 17% and our adjusted EPS guidance to between $7.30 and $7.40 per share. We also anticipate stronger cash flow due to the improved margin performance. Moving to Slide 4, which gives a more detailed overview of our quarterly results. Engineered Products revenue increased by 25% organically. Vehicle services performed strongly across all regions and product lines, achieving record bookings during the quarter. Demand for industrial automation was strong in the automotive sector and in China. Aerospace and defense reported their highest revenue ever in the second quarter. Waste hauling revenue was flat year-over-year as this sector continues to face challenges related to components and labor availability impacting product shipments. Nonetheless, waste handling bookings were robust, with backlog increasing by nearly 75% compared to the prior year. Engineered Products remains our most affected segment by input and logistics cost inflation due to material intensity, pricing dynamics, and a relatively higher share of international sourcing in vehicle services. This was reflected in the segment's margins, which remained flat year-over-year as strong volume leverage and pricing increases were offset by inflation in input costs and freight, along with challenges related to labor and component availability. Fueling Solutions grew by 25% organically in the quarter, driven by global demand in above-ground and below-ground retail fueling, with some lingering benefits from the EMV opportunity in the U.S. following the April deadline. The vehicle wash segment has performed well this year, and our recent acquisition integration is ahead of schedule. Activity in fuel transport in China remains subdued, but we are seeing signs of operators reopening their tendering activity. Order backlogs increased by 29%, and we expect our software and service business, along with vehicle wash and compliance-driven underground products, to help counteract anticipated challenges from the EMV roll-off. The segment enjoyed another strong sequential margin performance due to higher volumes, strategic pricing initiatives, productivity improvements, and favorable mix. Sales in Imaging & ID grew by 20% organically. The core marking and coding business performed well, driven by strong printer demand across all areas, particularly in China and India. Serialization software also surpassed expectations. The digital textile printing business saw significant growth compared to the previous quarter when many operations were shut down in Northern Italy, although it still remains impacted; however, we are beginning to see demand growth for large printers, especially in Asia, along with continued growth in ink consumable volumes. Margins improved by 420 basis points due to volume leverage, pricing increases, and productivity initiatives. Pumps & Process Solutions reported another excellent quarter with 34% organic growth, buoyed by improved volumes across all businesses except Precision Components. Ongoing demand for biopharma connectors and pumps has remained strong due to both COVID and non-COVID pharmaceutical trends. Industrial pumps grew by over 20% due to robust end customer demand, particularly in China. Polymer processing shipments increased year-over-year, with continued strength in Asia starting to gain momentum in the U.S. market. Precision Components saw a slight decrease in the quarter, although demand conditions have stabilized and are recovering well in some markets and regions, giving us confidence for the second half. Margins expanded by 910 basis points on strong volumes, favorable mix, and pricing. Refrigeration & Food Equipment showed impressive growth as well, posting 44% organic growth. Revenue from beverage can manufacturing doubled in the quarter, and bookings nearly doubled too, with the business now booked into late 2022. Food retail experienced broad growth across its product lines, with door cases now also booking into 2022, and the demand for natural refrigerants is driving significant growth in our systems business in both the U.S. and Europe. The backlog in food retail has now doubled compared to last year. The heat exchanger business grew due to robust demand across all regions, supported by rising order rates in commercial HVAC in North America and record order intake in EMEA, increasing lead times for heat pumps and boilers. Foodservice equipment saw an increase in the quarter, though it faced tough comparisons; however, demand from chain restaurants remains strong, while the institutional market is still recovering. Segment margins improved by 580 basis points, fueled by strong volumes and productivity improvements, although offset somewhat by availability issues related to installation materials and labor. In food retail operations, we expect these issues to lessen in the second half. Now, I’ll hand it over to Brad.

Thanks, Rich. Good morning, everyone. I'm on Slide 6 of the presentation deck, on the top of the page is the revenue bridge. Our top-line organic revenue increased by 30% in the quarter with all five segments posting growth, with particular strength in our Pumps & Process Solutions and Refrigeration & Food Equipment segments. FX benefited the top-line by about 5% or $68 million. Acquisitions added $19 million of revenue in the quarter. There were no year-over impacts from dispositions. The revenue breakdown by geography reflects strong growth in North America, Europe and Asia, our three largest regions. The U.S., our largest market posted 25% organic growth in the quarter on solid trading conditions in retail fueling, marking & coding, biopharma, food retail, and can making. Europe grew by 30% on strong shipments in vehicle aftermarket, biopharma, industrial pumps, and heat exchangers. All of Asia was up 38% organically on growth in biopharma, marking & coding, plastics and polymers, heat exchangers, and retail fueling demand outside of China. China, which represents a little over half of our business in Asia was up 33% organically in the quarter. Moving to the bottom of the page, bookings were up 61% organically, reflecting continued broad-based momentum across the portfolio. In the quarter, we saw organic growth across all five segments. Going to the earnings bridges now on Slide 7. On the top of the chart, adjusted EBIT was up $173 million and margin improved 400 basis points, as improved volumes, continued productivity initiatives, and strategic pricing offset input cost inflation. Adjusted segment EBITDA was up 350 basis points. Going to the bottom of the chart. Adjusted net earnings improved by $135 million as higher segment EBIT more than offset higher taxes, as well as higher corporate expenses primarily relating to compensation accruals and deal expenses. The effective tax rate excluding discrete tax benefits was approximately 21.7% for the quarter compared to 21.6% in the prior year. Discrete tax benefits were $11 million in the quarter or $9 million higher than 2020 for approximately $0.07 of a year-over-year EPS impact. Rightsizing and other costs were $11 million in the quarter or $8 million after-tax. Now, on Slide 8. We are pleased with the cash performance thus far this year, with free cash flow of $364 million, a $96 million increase over last year. Free cash flow conversion stands at 9% of revenue for the first half of the year, 80 basis points higher than the comparable period last year, despite a significant investment in working capital and the impact of prior year tax deferrals that did not repeat this year. Also as we discussed last quarter, we remain focused on delivering against our customers’ strong order rates and build inventory to ensure we can meet the current demand in the second half of the year. With that, I’m going to turn it back to Rich.

Thanks, Brad. Let's take a moment to pause because this slide is quite complex, but I believe it provides a clear view of our expectations for the second half of the year, including our segment outlook and how it relates to our full-year guidance, which I'll explain shortly. It's important to remember that demand is strong across our portfolio, so let's keep perspective on the headwinds and market dynamics. We managed challenges in the first half and are confident we can do so again in the second half, as this reflects the business's current dynamics. We anticipate strong top-line growth in Engineered Products through the end of the year, driven by a solid backlog and positive bookings trend. We expect continued momentum in the vehicle aftermarket and industrial automation, while improved order rates and backlogs in waste handling and industrial winches should lead to significant year-over-year growth in the second half. Conversely, we expect the aerospace and defense segment to be slightly down mainly due to challenging year-over-year comparisons in project deliveries. Ongoing supply chain constraints and cost inflation will continue to impact this segment significantly. Our waste handling and automotive aftermarket businesses are our largest areas affected by the combination of raw materials inflation, extended supply chains, and a higher proportion of assembly labor. Our management teams are performing well despite these headwinds, as reflected in our growth rates and order books. However, we are now at a point where we need to defend our market position, which may slightly hurt near-term margins but won't be substantial. We expect Fueling Solutions to achieve organic growth this year, surpassing our initial expectations as a result of increased systems and software growth, recovering underground demand, and enhancements in vehicle wash. Keep in mind, the above-ground business will face challenges in the second half due to North American EMV volumes. We foresee that margins in Fueling Solutions will improve for the full year, although we anticipate slight margin compression in the second half because of lower volumes and negative product and geographic mix. We expect trading conditions in Imaging & ID to remain positive for the rest of the year, with our core marking and coding business maintaining its growth trajectory, aided by services and serialization products. Digital textile printing is on the rise, and we hope to exceed 2020 levels by year-end, though we still may fall short of the highs seen in 2019. Operating margins are expected to stabilize in the second half. Pumps & Process Solutions should also demonstrate solid performance in the second half, with strong demand in biopharma and hygienic applications leading customers to place orders for 2022. We are strategically investing in cleanroom capacity for this platform to foster growth. The industrial pumps market is strong, driven by high end-customer demand rather than channel stocking. The plastics and polymers sector is expected to remain stable, though it faces challenges from a tough comparison to last year's strong performance. Precision Components is predicted to return to growth in the second half as new OEM builds will offset increased activity in refineries and petrochemical plants. We expect strong margins in this segment, although there might be slight dilution because of mix changes as the Precision Components business recovers, but overall, this segment's profit trajectory is promising. Refrigeration & Food Equipment, with its large backlog and high order rates, is projected to finish the year strongly with double-digit growth across all operating businesses. We are experiencing healthy new orders in the key food retail sector and our leadership in natural refrigerants is contributing to significant growth in our systems business. We will begin ramping up shipments of our new digital door product, and Belvac is managing its record backlogs while now taking orders for late 2022 and into 2023. The heat exchanger business is also well-positioned, seeing strong order rates across various sectors and geographies. We've been investing in capacity and new capabilities in these two areas to seize growth opportunities. Demand for foodservice equipment has normalized, and growth in the restaurant chain and institutional sectors is on the rise. We expect solid growth in this business during the second half, although it is against a low comparable. Margins are expected to continue their seasonally adjusted upward trend for the rest of the year, supported by improved volume leverage, productivity gains, and favorable product and business mix that should counterbalance operational challenges from component and labor shortages, increased logistics expenses, and input cost inflation. Moving to the next slide, we are proactively investing in our business to stimulate growth and enhance productivity and long-term portfolio quality. Capital projects with high returns on investment are our top priority for capital allocation. On the left, you can see a selection of growth and productivity projects in our pipeline encompassing $75 million in spending. The project mix is balanced with a focus on new capacity for long-term growth in key areas of our portfolio. Our secondary capital allocation priority is strategic bolt-on acquisitions to boost our long-term growth potential and portfolio attractiveness. All four of our recent acquisitions were in either digital or high-growth single-use pump sectors. While these are minor additions, we are excited about scaling these innovative technologies within our G&A portfolio. We are continuously seeking acquisitions and have a strong M&A pipeline as we approach the second half of the year. We currently have about $3.3 billion available for investments based on our full-year 2021 projections. We are raising our top-line forecast to reflect the sustained demand trends we are observing. We now expect to achieve 15% to 17% total revenue growth this year. The increase in our $0.55 adjusted EPS guidance accounts for the supply chain and input challenges discussed earlier, and we expect free cash flow generation to improve due to margin enhancements. At the bottom of the page, we present our anticipated 2021 performance from a multi-year perspective. We are on track to deliver strong returns through a combination of significant organic revenue growth, substantial margin expansion, and prudent capital allocation. Before concluding, I want to express my gratitude to everyone at Dover for their resilience and achievements amid the current challenging environment. With that, Andrey, we can open the floor to questions.

Good morning, guys, Rich, nice quarter.

Thanks, Andy.

Rich, can you give more color into what you're seeing in terms of margin progression in Pumps & Process and Refrigeration? I know you just talked about it, but if you look at Pumps & Process, you've been sustaining that 30% level, can you keep doing that, and I know you talked about a little dilution there? And then on the refrigeration side, like how would you assess the sort of march toward that mid-teens margin goal that you've talked about?

On the Pumps & Process Solutions side of the portfolio, nothing deteriorates in the second half, it's just pure mix. So what I was trying to make clear is one of the businesses that suffered greatly last year and is beginning to improve now is our Precision Components business that is slightly dilutive to margins, but in terms of absolute profit, it's a positive, so I wouldn't get overly concerned about that. On the refrigeration side, we expect third-quarter margins to be the highest of the year just based on seasonality and the size of our backlog and everything else. Quite frankly, we're a bit disappointed in the margin in Q2, but I don't think that's the fault of management, but we've had a really difficult time with freight costs and components and labor availability. So on one hand, I think the effort on their part to get the product out the door was excellent. The bottom line is we disappointed a bunch of customers in our ability to get the product out because of the supply chain issue. So the trajectory is good, and as you can see from the backlogs, this is more of a 2022 story now more than a 2021 story.

That's helpful. And then we know you want to be conservative given all the crosscurrents out there, but you're obviously forecasting revenue to come off a bit from Q2 with a backlog up 70%, you talked about EMV coming down, supply chain, the virus is still out there, but you didn't mention in your release that you have visibility already into '22. So maybe you can just talk about that visibility, and obviously it's in refrigeration, but is it across all the businesses, so that organic growth could actually be quite strong as you go into '22?

Well, look, I mean, I'm not going to complain about the size of our backlog, and if you’d run the calculations on that we couldn't get it out the door over the balance of the year if we wanted to. So it's up to execution, number one. And with the exception of Belvac and Maag, most of our business is short cycle. So we’ll see at the end of Q2. I mean, look at the end of the day, it's the same discussion we had at the end of Q1. The demand is there, it's up to us to get it out the door. I think that when all is said and done, we probably are going to do better on average because I think that we're advantaged from a supply chain point of view versus some of our competitors, and that's what's going to be winning in the marketplace. It's not so much a pricing dynamic right now, it's whether you can get the product out the door. So right now, I don't think in my tenure here, we've never had backlogs like this, and it's a good problem to have.

Thank you, Rich.

Hey, good morning, guys.

Hi.

Good morning, Steve.

Just kind of digging into Andy's question a little bit of a different way. I think normally, you guys convert your first half orders relatively close as a percentage into sales from first half to second half. Obviously, that suggests like a kind of a reckless high revenue number for the year relative to your guidance like $700 million higher. Obviously, there are supply constraints and things may be getting pushed into '22. Can you maybe just talk about the mechanics of this backlog, what's converting, what's different when it comes to the conversion from orders into sales this cycle, if you will? I mean I'm sure it's much more extended obviously, this cycle or maybe like just mechanically, is there double ordering going on, are guys pushing deliveries into '22, just a little more of the mechanics around that?

Sure. I think that we discussed it a little bit at the end of Q1. Clearly, based on our backlogs of exit in Q1 and then Q2 because of the demand function was going to be higher than kind of what a normal seasonality would be just because of where the demand was. So it's just purely a function of where you could get it out the door or not at the end of the day. So that's the good news. So I don't think you can look at Q2 and just say, well, I'm going to go back and look at history and then Q3 is this much higher than Q2 and then that it’s going to spit out a number as you said, that's just not realistic. So as point number one, so I'd be careful about calculating seasonality based on history just because of the strength of the first half just because of the recovery coming out of the pandemic. In terms of the backlog, yes, we'd have to break it down because we've got some long cycle backlog, I mean we mentioned Belvac, which is booking into 2023 now is a piece of that that will just convert over time. We don't believe that there's double ordering going on right now. From what we can tell, it looks like it's just a recognition by the customer base of the constraints that are out in the system that in previous periods you just didn't have to put the orders in, you want to get in line. So that is what is expanding the backlog. I mean, I think you asked the question at the end of Q1 about this whole issue of channel stocking, destocking, and we took a close look, I mean, we grew our industrial pumps business by 20% in the quarter. So we took a or over that actually, but so we took a close look at channel checks and we don't see that inventory building up at our distributors, it's just passing right through. So that's good news at the end of the day, because it means it's fundamental demand. So I think it's two issues. We've got some long cycle businesses that are booking out well further than historically they used to and then I think on our short cycle businesses, I think there is a recognition of the constraints in the supply chain that's just making everybody get in line further out than they normally would have.

And I guess on that front on the working capital side, is there any unwind of this big inventory and receivables, I guess not receivables because your sales are going to continue to grow, but on the inventory side, I mean, any flush you see in the second half, I know you raised your free cash flow guidance, but if there is anything to nitpick at this quarter would be the working capital build was kind of sizable, any unwind there in the second half?

Well, I mean, I think the working capital build has been to our advantage and we'll see after everybody reports in terms of top-line, I mean, having the product available or having the components available that convert has been an advantage to us. I don't see anything fundamentally deteriorating in our working capital. We will see in the second half. I would expect to see some liquidation in Q4. And if we don't on the industrial working capital side, that means that the demand outlook for '22 is robust and what we may carry it again, but I don't think that just means higher earnings and the outside period. So right now, sitting here, we would expect free cash flow to be up, no real deterioration in terms of the metrics of working capital. We'll leave it at that to see how order rates progress over the balance of the year.

Great, thanks a lot.

Thanks.

Hey, thanks, good morning, everyone.

Hey, Jeff.

Rich, maybe just touch a little bit more on M&A, right, I mean you've been doing some bolt-ons, but as you know, we've got a kind of multi-billion dollar capacity here, activity seems to be picking up in your neighborhood, right. I wonder if a, you see things kind of trading away from you that you are interested in or just kind of the actionability of what you might have in your pipeline?

Yes, without getting into the specifics, I think that we lost out on one deal that we chased pretty hard due to valuation, some of the other ones that you've seen transact, we're well aware of those assets and we're not participating in them. The bottom line is, it's a good news, bad news story. I mean, the bad news is, is valuations are what they are and I'll leave it at that. The good news is because valuations are what they are, then there's a lot building up that wants to come to market, because I think this is a recognition of, these are the salad days for multiples of not even earnings anymore, but of whatever you want to choose to be the multiple. So we're looking at a lot of stuff right now and we're going to remain disciplined. I mean, I think the things that we've got there are small, but we think that the network effect on the leverage of those small products is, our expectation, the returns are going to be very high in the deals that we did and we'll see in the second half.

And a unrelated different question, just back to kind of price and how you're managing all this, what are you doing differently, I'm sure you can use the demand pulse to just extract price that people want the product bad enough, but are you able to on a drive deposits do other things to just kind of improve the commercial terms of how you're transacting with folks?

It depends, I think because demand is high and capacity is tight. You can manage profitability by customer probably a little bit more efficiently than in the past, but I think in certain of our businesses and I'll go back to what I talked about at Engineered Products, when you get to the third price increase, do you actually go for the fourth price increase because the fact of the matter is, you run the risk of demand destruction in the short term, and that's not good. So part of my comment about Engineered Products, especially around ESG and VSG is at a certain point if we go negative in terms of price cost, but the volume remains robust and the installed base goes up, that's a better trade because we believe that some of these supply chain constraints and raw materials will roll off hopefully sooner than later. And you know what, do you really go back to your core customers and say sorry, but here comes another price increase. So I think that we're managing differently across the portfolio, but we don't want to force short-term demand destruction by trying to just be draconian.

Great, makes sense, active management. Appreciate it, thanks a lot.

Hi, yes, good morning.

Andrew.

Hi, how are you? Just a question just to sort of to continue sort of to talk about capital allocation. You did sort of highlight over $3 billion in dry powder. How should we think, you sort of clearly have established yourself as one of the most consistent operators post COVID. So how do you think about sort of the pace that you would like, right, assume that valuations stay where they are, but how do you see the pace of capital allocation per year in a normalized environment assuming that prices stay where they are?

I’m not sure how to answer that. Currently, we are realistically looking at using about two-thirds of our available capital. It’s uncertain whether we will proceed with that, but in terms of the number of potential targets and a practical assessment of their values, that represents about two-thirds of our resources. This is significant at the end of the day. While this is a practical outlook, there are some opportunities we just can’t pursue. I find it interesting that the return on invested capital has shifted significantly over the past year. I’m not here to criticize anyone’s deals, as everyone has their own strategies to some extent. The downside is valuation, but the upside is that there are numerous assets and transactions in the market with noteworthy valuations. Therefore, the number of available opportunities and those anticipated to emerge actually supports capital deployment.

That's a great answer. Thank you. And then the other question maybe I missed it, but did you comment on what the price increase was in the second quarter and what are you modeling for the second half of the year?

The price to raw materials improves in the second half of the year versus the first half of the year. The outlier is logistics costs and line stoppages, which is really the negative headwind, but priced cost on a raw material side, it's actually better in the second half than the first half.

But what was the price component of organic growth in the second quarter?

It's not a significant number.

And then...

It really comes down to, Andrew, it comes down to the timing of when those price increases. Rich is saying there are multiple times that price is being put in. So it's not one big bang at January 1, it kind of spreads across the year. So you get that effect.

Now, now I got it. Looking at your price reaction today, I don't think anybody is complaining about your execution. Thanks so much.

Thanks.

Good morning, guys.

Hi, Scott.

Hi, Scott.

Is there a way to translate your comment about disappointing customers into an on-time delivery metric and provide us with some context on what's considered normal versus where you currently stand?

There are really two dynamics at play. Our lead times are disappointing for our customers because there have been years when we could convert orders within the month, but that’s not possible now. Everyone has seen this issue for six months, leading to backlogs as people realize this situation is more persistent than initially thought. The silver lining is that this does build our backlogs, but the downside is that our lead times have increased. Additionally, some of our businesses are facing significant logistics challenges and labor availability issues, which contributes to the disappointment when we commit to delivering a product by a certain date and fail to meet that deadline. I can quantify this in financial terms, but I would need to check the on-time delivery statistics. Overall, it seems acceptable, yet businesses like VSG, which has the most extended supply chain, are facing the most challenges compared to Printing and ID, which are not grappling with these issues to the same extent.

Okay, now that's fair point. So just to follow-up, I mean, all the questions on M&A I think are appropriate just given where your leverage ratio is. But you could flip it over and just say well valuations are crazy, why not sell some assets here because you do have a fairly broad portfolio and some things seemed a bit better than others and is there any appetite to doing so?

No, I think that's a fair comment. I suppose that's all I can say about it, but you're correct that valuations both inbound and outbound are what they are, and you can manage that in both directions.

Yes. Okay, I'll pass it on. Thank you, guys.

Thanks.

Hi, good morning. Just wanted to circle back maybe to Slide 9. So just to try and understand essentially is the point here that sort of this is largely relating to a half on half margin outlook and so sort of company-wide second half segment margins may be down slightly versus the first half, and then within that you've sort of got DEP and DFS may be down a bit DRFE flattish, and then DII and DPPS flat to up half on half. Is that the right sort of summary of that slide, just to make sure it's sort of half on half we're looking at?

Yes, I believe that if you compare my comments to the slide, they will align. We are providing an honest evaluation based on the current market conditions, highlighting operational challenges and pricing issues, along with insights on product mix differences from the first half to the second half. As I stated, I don't think it requires excessive concern. We managed well during the first half, and I anticipate our management will continue effectively in the second half. However, we must acknowledge that we are making certain decisions, such as in the case of DEP regarding pricing, which, while potentially maintaining solid profit, may have slightly reduced margins because we have chosen to focus on increasing volume, which I believe is the right approach in that scenario.

That's very clear. And then, secondly looking at the cash flow, you've addressed the working capital point once or twice. Capital spending is up a decent amount this year, I think the sort of low double-digit type increase year-on-year. Just trying to think about sort of the outlook from here, how much does that reflect the sort of catch-up spend, you laid out some projects in the deck after a weaker CapEx number last year for obvious reasons, and how much is this sort of a sustainably higher level, just trying to understand how your capital intensity looks on the CapEx front beyond 2021, should we see CapEx normalize lower again or will be flat when we look at next year?

Well, I mean, I think that '20 we can just throw out, right. I mean, at the end of the day everybody reacted to the change in market conditions appropriately. So, like as a percent of revenue and we'll see where we end up and I don't want to do the calculations here, but as a percent of revenue, '19 to '21 is probably flattish and I would expect that to be the same going into '22. I mean, one of these days we're going to do a presentation on our returns for organic investment and they absolutely blow away anything that we do inorganically. So to the extent that we find the projects going into '22, we'll spend it internally, but right now sitting here today, do I expect as a percent of our revenue to go up dramatically in '22, no.

That's helpful. I think there are a lot of discussions about broader CapEx super cycles, which seems a bit strange. It doesn't appear from Dover's internal outlook that we will see anything significant in terms of CapEx intensity as we look ahead.

Well, you know, I think that there is an interesting argument and I would agree with it that to the extent that labor inflation is durable and that supply chain, the issues that we're having supply chains will improve, but not dramatically. There is an argument to be made that the returns on automation are going to be better than they've been over the last five years to six years, and I would agree with that.

Thanks. Good morning, guys. Nice quarter.

Thanks, Joe.

Thanks, Joe.

I would like to clarify Julian's question regarding the margins for the second half of the year. Rich, it seems that you and your team have effectively managed these margins in the past. From my review of Slide 9, it appears that you believe the incremental margins will likely remain in the 30% range that you reported in the second quarter, with perhaps some slight pressure. Is that an accurate assessment of your outlook for the second half?

Yes, I believe we are aiming for transparency. We could have presented the second quarter results and said everything is fine, but we need to acknowledge that there are some challenges to address. We shouldn't get overly excited about the current situation. The facts are what they are; we've managed them in the first half of the year. In the second quarter, it becomes more of a mix issue, which isn't a concern. As I mentioned before, DRFE is set to achieve its best quarter of the year in terms of both revenue and operating margin, which is excellent in terms of absolute profits, but it does affect the overall Group margins. However, I wouldn't recommend slowing down operations to safeguard the margin. In some of our businesses, if Precision Components sees revenue growth in the latter half of the year, it may slightly dilute the very strong margin we have in Pumps and Process Solutions, but I don't see this as a significant issue. We want to guide everyone to consider the margins in Q2, but historically, Q3 tends to be higher than Q2. So, if I model that, it could provide a target for us, though I'm uncertain due to the increased demand and operational leverage we're experiencing in Q2.

Right. We got to be a little bit careful with the conversion to the back half as well because price materials does impact conversion. So just keep that in mind is that that has nothing to do with absolute profits per se as Rich has talked about, but the conversion rate is influenced by that.

Sure. Now that makes sense and fully appreciate all the color you guys are providing. I guess my one follow-up and maybe just kind of focus on the near-term for a second. When you think about third quarter from a pure revenue and EPS perspective, would you expect it to be up versus the second quarter or similar? I'm just curious like how you guys are thinking about it with the way that the backlog is kind of converting into your business?

Similar, I guess is the answer.

Okay, great. Thanks, guys.

Thanks.

Thank you for taking the question. I would like to ask about Slide 9. You mentioned positive commentary on the price cost for DII and DPPS, but looking through your disclosures, these segments showed the smallest pricing gains in the quarter, both just over 1%. This seems counterintuitive; even with less of a pricing boost in these two areas, you expect a better price cost dynamic. Can you clarify what's happening with these two segments?

I believe Brad touched on this in a previous question. We don’t set our pricing on January 1st; it’s handled differently. There’s a signaling effect to manage backlogs. In certain businesses, we might announce a price increase at the end of the first quarter, which impacts the timing of that increase. As a result, it influences the performance throughout the rest of the year. This situation reflects the timing of the price increases and the impact of the first half versus the second half of the year.

Okay, got it. Sorry, I missed that. Then I guess my follow up just sort of looking at your order intake, right, in Refrigeration & Food Equipment, Pumps & Process Solutions, in both these segments, you're running well ahead of what we saw pre-COVID. And I guess my question is, if we're not talking about some kind of a CapEx super cycle here, what is really happening with these end markets, and is it fair for us to think that this is sustainable to some degree into 2022 or is there a hangover to be expected here as things normalize? Thank you.

I believe I've addressed this in various ways. Backlogs are increasing, reflecting constraints within the system. Next year is likely to present an interesting dynamic; as these constraints ease, lead times will shorten, which could negatively impact backlogs to some extent. As I mentioned earlier, we need to be cautious about interpreting absolute backlogs and using them to predict future revenues. Ultimately, backlogs fluctuate based on lead times, market conditions, and other factors. While I can foresee backlogs decreasing, I don't view this as overly concerning because it suggests improvements in our supply chain logistics, which would ultimately benefit margins.

Yes. So Rich, to clarify I wasn't talking about backlog because I totally agree with what you're saying. I was wondering more about your bookings, right, which have been very, very strong year-to-date even relative to pre-COVID?

I think we are performing exceptionally well in Pumps & Process Solutions. We presented our expectations for the end of 2020, and as I mentioned at the end of the first quarter, we believe we are at least in the early stages of a three-year growth cycle for demand on DRFE, which is encouraging. This trend is widespread, affecting not just door cases but also our systems business, SWEP with heat exchangers, and Belvac, all of which we see as part of a long-term cycle.

Great, thanks for the color.

Thanks.

Thank you. Good morning, everyone.

Good morning.

Good morning.

Hey, I know we covered a lot of ground here. It came up multiple times about component and labor shortages. So Rich, if you could just take us through like where is it most acute today on the component side, is it semiconductors, printed circuit boards, are you qualifying new suppliers. So that's the component side, and then on the labor side, any color there, unfilled positions are you expecting a significant step-up in labor costs as this needs to adjust. So take us through that if you could?

Hope boy, well, we've got a pretty wide portfolio, I'll make some general comments about the components. They're all tied. They are more problematic if they're large and imported, because if you take a look at what's going on when the logistics supply chain in the Port of Los Angeles and all that, it is a very difficult situation right now, which only impacts a small portion of our portfolio because as I mentioned in my comments at the end of the day, we think that we are winning in the marketplace because we don't have a lot of instances of that. If you've got very long supply chains and it's containerized freight coming out of Asia back to North America to fulfill demand, you are suffering quite frankly. On the labor side, it's purely in our operations that I have a higher propensity of assembly labor, and for all the reasons that we can understand that's been difficult. I think it's not getting worse as we move through the second quarter, which is good news. So, hopefully in September, when some of these government influences in terms of the labor market begin to roll off that it will get better and everybody is going to go back to school in September. So our view right now is it's probably going to remain difficult through August, and I think that we're hopeful in September that the situation is fine.

That's really helpful. And then last one for me, just you talked about this last quarter and how did it play out where you said you were going to give the business units more autonomy in managing their own working capital that you gave them the green light to build inventory, and I know there were some surprise there because you hadn't done that before, but how has that worked out, is that going to be a permanent, was that a one-time event just you needed to get in front of this demand, but just some color there would be helpful? Thanks.

I mean, if the demand holds up then we'll continue to kind of give that latitude because the absolute profit versus the carrying cost of the working capital, the math works, I guess the best way I can say it. I would expect if we get improvement in the logistics supply chain that it will come down naturally, because that's what's really driving it at the end of the day. We're basically given the green light to everybody of, you've got the backlog, don't be reticent of trying to get the sub-components in because we want to convert.

That's really helpful. Thank you.

Thanks.