Q1 2020 Earnings Call
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Ladies and gentlemen, today's call will begin momentarily until that time, you will be on musicals. Thank you for your patience.
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Oh good morning.
Welcome to the overall first quarter 2020 earnings conference call.
Today will be a richer Tobin, president and Chief Executive Officer.
Sorry pack senior Vice President and Chief Financial Officer.
Myself Andre Golf course, Vice President corporate development and Investor Relations.
After the speaker's remarks, there will be a question and answer period, you would like to ask a question. During this time press Star then the number one of your telephone keypad. If you would like to withdraw your question. Please press the pound key on your telephone keypad as a reminder, this conference call it being recorded and your participation in flight consent stopped recording this call.
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Goal will be available for playback through May well what are your portion of this call will be archived on our website for three months.
Oh, It provides non-GAAP information and reconciliations between GAAP and adjusted measures are included in our Investor supplement that 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 that you called 19 on a global economy and on our customers suppliers employees operation business liquidity and cash flow, we caution never want to be guided in their analysis Dover by referring to our form 10-K.
Thank you for the first quarter Burleson factors Oh, no results to differ from those anticipated any forward looking statement.
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 Tobin.
Thanks, Andre Good morning, everyone. We're gonna take some sage advice and briskly go through what was a solid first quarter.
And get straight to where we are from a market demand perspective, and what actions, we're taking with our operations cost structure and balance sheet to adapt ourselves to this extremely challenging environment.
I'm not going to read the next slide that we mentioned that the urgency in magnitude of the present challenges not lost on us and we're working through these times with resolve in a sense of responsibility to our employees.
Customers partner shareholders, a local communities, where we operate we understand our role as a supplier into many critical societal functions like food packaging and retail fueling waste removal and many others. Moreover, our business the supply directly into projects.
Aimed at fighting the outbreak such as commercial cleaning masks hospital bed and ventilator production as wells as biopharmaceutical therapy development.
Let's go to slide four of the quick summary of the first quarter results. We recognize these results are looking into the rear view mirror.
Given the pace of change in the last few weeks rest assured that despite solid Q1 results, we have zero complacency, given the progressively challenging outlook into Q2.
To sum up Q1, our ability to remain largely operational coupled with new work, we did on our cost structure.
Productivity initiatives more than offset the beginning headwinds with cold with 19, which largely impacted our businesses in China in Italy in the quarter.
Let's go to slide five <unk> briefly look at segment performance engineered products organic sales declined 2% as demand and auto expose businesses the slowed down.
The vehicle aftermarket business also experienced operational interruptions in or China, and Europe based facilities.
Just handling continue to grow operating strong backlog digital sales in the waste business were up nearly two times on a year over year basis pricing cost containment.
In response to lower volumes as well as productivity actions, resulting in 100 basis points higher adjusted EBIT margins for the segment moving out the feeling solutions saw robust activity in North America, driven by demand for M.B. compliance solutions worse, Europe, and Asia declined due to overhead related production and supply chain in a row.
Options on project deferrals, Additionally, manufacturing or vehicle watch segment.
In the U.S was shut down in March due to local government mandates segment delivered 500 basis point margin improvement as a result of favorable geographic and product mix productivity actions and cost controls as well as pricing.
Imaging and I'd declined.
Organically, 4% in the quarter marketing coding was approximately flat on strong demand for consumables due to surgeon production volumes of consumer goods.
In March which offset the challenging conditions in Asia in Q1, our digital textile printing business had a difficult quarter as all of our operations are in the lumber <unk> region of Italy, which bore the brunt of the cold with 19.
This was further exasperated by the sudden insignificant impact of the crisis on the global textile and apparel markets margin in the segment declined only 80 basis points is our cost containment actions and favorable mix impact of consumables, largely offset the significant volume drop in our digital printing business.
Pumps and process solutions topline declined 1% organically strong performance in our hygienic and bio pharma pumps as well as in plastics and polymer systems and components, largely offset slowing market conditions in industrial pumps and downstream oil and gas complex. The segment delivered another quarter of strong margin improve.
Isn't driven by cost containment restructuring actions as well as pricing more than offsetting negative impact of covert inflation in FX translation, and finally, it's refrigeration and food equipment.
Organic sales declined 4%, primarily driven by weaker demand for heat exchangers in foodservice equipment bolt is result of governmental actions to combat the covert around the world core food retail business declined less than 1% as grocers began to postpone remodel projects later in the quarter segment margin declined due to.
Covered related production curtailments in Asia, and Europe in swept as a volume reduction and as volume reduction in food equipment from there I'll pass it onto Brad.
Thanks Rich.
Right now.
Oh you guys.
Yeah.
All right, let me, let me go to slide six.
On top is the revenue bridge as you will know FX was a meaningful headwind in Q1, reducing top line by 1% or 23 million driven primarily by the dollar appreciating against the euro.
And also Brazilian Swedish in Chinese currencies bookings were up 1% organically and were similarly negatively impacted by FX and positively supported by acquisitions.
[noise] performance by geography, Unfortunately reflects the quarters quota virus outbreak around the world.
All of Asia declined 19% organically.
Well within Asia, China posted a 36% decline due to significant mid quarter disruption.
It was down 7% principally driven by few fueling solutions in engineered products [noise] <unk>.
So our largest market grew 4% organically with four out of five segments posting organic growth.
We expect Q2 to reflect a year over year drop in demand in the U.S. in Europe as Colgate expand it didn't seem to April also we're watching cautiously for relative stabilization in China.
Startup has net although startup has been slow in some markets.
[laughter].
Let's go to yearning bridge on slide seven.
I'll refrain from going into detail on these bridges for the quarter with three.
Five segments, posting triple digit basis margin improvement.
Further helped by reduced corporate expenses in addition to cost actions.
Margins were generally supported by mix pricing and impacted negatively by first and foremost lower volumes inefficiencies associated with operational disruption FX and inflation.
Outside of steel in fabrications would started to trend positive.
We have seen material cost inflation in the quarter.
Now on slide eight cash flows top of mind as we move into Q2, we're pleased with the first quarter cash generation with free cash flow for the quarter of 36 million a 48 million.
Improvement over last year recall, the first quarters traditionally our lowest cash generating quarter and typically shows negative cash flow. Our teams have done a good job managing free cash flow.
We're actively in this uncertain environment, we expect to continue to proactively manage working capital into the second quarter.
Capital expenditures were 40 million for the quarter slightly increased versus comparable period as we continued to execute our inflight growth and productivity capital projects started in 2019.
Most of these projects are slated for completion in the second quarter.
Lastly, let me update you on our financial position on Slide nine we believe dover's financial standing is strong and positions us well to navigate the unfolding period of uncertainty.
First we have been targeting a prudent capital structure in our leverage at 2.2 times EBITDA places us comfortably in the investment grade rating with a margin of safety.
Second we don't have long term debt maturities until 2025, thanks to the refinancing effort, we undertook in Q4 last year, which shifted out the maturities and reduced our interest expense.
Lastly, we are operating with approximately 1 billion of current liquidity, which consist of about 500 million of cash and another 500 million of unused revolver capacity.
We drew 500 million of a revolver in the first quarter out of abundance of caution when commercial paper markets experienced volatility in late March.
Proceeds were used to principally pay off maturing commercial paper.
If you're back into commercial paper market in April and we'll use cash from the program to potentially.
Hey, the revolver.
If conditions remained stable.
So in summary at this time, we expect free cash flow to remain strong for the company as we move into the second quarter.
With that I'm going to pass it back to rich.
Okay, let's try not to put each other on mute sorry about that Brad let's go on to slide 10 cents, we suspended for your guidance will dive deeper into current trading conditions.
And our actions over the next few slides slide 10, we will cover the current demand outlook as of mid April and projected status of our operating footprint for the quarter.
First engineered products as previewed in our Q1 results industrial automation and vehicle aftermarket as well as industrial winch markets have slowed and continued trending week. This material deceleration in March after positive January and February.
We are taking capacity management actions in Q2 across these businesses to rightsize, our cost and working capital.
Waste handling continues to be constructive as our waste municipal fleet customers operators essential businesses.
And are seeing large increases in residential volumes, which are more truck intensive and fueling solutions feeling solutions is a bit of a bright spot.
Order trends have been roll Boston U.S.N.V. and the business saw good trends in March with some sequential slowing in April customer base is operational as retail fueling is generally considered essential business worldwide and record high fuel margins on low oil price help operators offset the reduction in volume and traffic.
On the downside transportation of vehicle wash markets are likely to see delays and capital outlays daring during this near term and certainty.
We are largely up and running in the segment, except one vehicle watched facility in Michigan and a few smaller dispensers sites in Brazil, Italy in India.
And imaging and I'd digital textile printing will be challenged and 2020 as fashion and apparel markets deal with an unprecedented shut unprecedented shutdown.
Apparel retail globally, marking and coding has held up in Q1 was strong orders in February and March and we expected to be relatively resilient at 40% or the cells are driven by consumables tied directly to current production volumes in fast moving consumer goods, which surged in Q1 and should sustain as consumer shift.
Home based consumption of packaged goods.
Parts of this business are not immune, notably industrial end markets and printer and self service sales are customers delayed planned maintenance due to peak utilization.
Or visitation indoor travel restrictions, we expect to recover such delayed sales or later time, we're progressing with the integration assist deck, which he is responsible for the majority of the backlog increase if we see in the segment.
In pumps in process solutions, while we are seeing sequential slowdown in the oil and gas markets served primarily by our precision components business trends appear constructive and military chemicals food and beverage.
Power generation, and some industrial verticals, while bio pharma and hygiene or areas of strong growth.
Maag plastics and polymer equipment has not seen material project cancellation than continues operating with the solid backlog that equal that equates to nearly half of their annual revenue base.
We have a substantial spare parts business in this segment in large share revenues drop is derived from consumables or installed base replacement versus first fit capital construction. These should be supportive factors.
And in retail refrigeration and food equipment. This segment is facing the largest near term demand had within our portfolio and its spread across several businesses within the segment in the core food retail business orders trended positive in February and March but starting in March many retailers are forced to postpone remodel Lincoln and can.
Structuring projects.
Due to peak traffic volumes local restrictions, an inability of contractors and technicians to gain site access.
Backlog in this business is solid but the shipment timing remains uncertain, we expect that increased wear and tear store equipment.
Will result in a surge of volume of frozen refrigerator products being sold will accrue to will create substantial pent up demand and we will be well positioned to capture the rebound when it comes overall, we expect several quarters a mix to potentially variable performance in this business.
Our heat exchanger businesses, but its face both operational disruptions in Asia and demand reduction in H.B.A.C. industry globally with material sequential slowing in March backlog has improved in the quarter, but we do see uncertainty here as we must wait for our customers to come back online.
Our commercial foodservice business is facing significant demand challenges the restaurant segment, only partially offset by opportunities in the institutional market.
It's no hiding here March has seen Unprecedent declined in order trends, we will manage capacity aggressively through the year with significant curtailments already begun in Q2.
Let's go to the next slide.
We have taken a proactive cost containment stance early in Q1 as you can Crs gene a cost has declined in absolute terms in Q1, mainly driven by travel curtailment.
Lower incentive compensation costs.
[noise] quantum of these actions accelerates in Q2.
I will cover on the next slide.
We are progressing on our 50 million center led cost out program as planned with 13 million achieved in Q1, primarily from my T. In a variety other cost items for clarity sake. The charts are not fully additives. Both include SGN as you can see from the footnote on the cash flow side, we're cutting capex light.
The demand environment.
Are we view 100 million is committed to non discretionary spend which shows you. We have additional flex we have should the downturn be deeper and longer than expected. We carry over 1 billion of working capital in the business, which we scaled down with revenue or better primarily driven by inventory management.
After all that lets get onto them off and sport and slide in the deck, let's not sugar coat. This Cupid Q2 is gonna be tough.
Despite a healthy backlog, we will be a curtailing are adjusting capacity down across a large proportion of our portfolio companies driven by the following in some locations government mandates prevent us from operating you can see in that business that this impacts the most in several end markets I touched on earlier weak demand warrants curtailed capacity.
In food retail, we expect a significant portion of our backlog to shift to age two as retailers continue facing operational challenges in executing their projects as a result of heavy traffic an inability of contract or access and in category for is driven by proactive working capital management and hedge against weaker demand environment in.
Cast we have capacity to catch up a that deferred production in the second half.
In addition to the lost margin on lower revenue. These capacity reductions in curtailments will cause year over year compare comparative material fixed cost under absorption of approximately $35 million to $40 million in the corner.
We estimate that our variable cost reduction levers and flow through on inflight programs will positively contribute approximately 65 million in the quarter, which you would take you back to the previous slide of the offsets that we had in Q1.
On the cash flow side, we expect inventory management to contribute positively in the quarter, we do intend to pay the dividend to schedule in June and we'll fund bolt on the bolt on acquisition of Amtech in Q2.
So to wrap up.
Oh, let's put some directional guide posts out there for the area and the absence of formal guidance fear can unfold and in with a variety of different scenarios, but old will almost certainly be negative revenue change of yet unknown magnitude.
We will focus on what we can control best our costs.
We target full year decremental margin of 25% to 30% of which we have a variety of actions to offset volume under absorption.
So a glimpse of the levers in the prior to slides and we prepare to full arsenal of actions for the remainder of the year on the cash flow side will reduce our capital spend the flexibility to defer more we are targeting cash flow conversion in excess of 100% of.
Adjusted earnings for the year.
We have suspended our share repurchases, but intend to continue to paying a dividend and lastly, our M&A posture remains opportunistic we will continue pursuing logical bolt on acquisition acquisitions at rational valuations.
Information I want to thank everyone at Dover for their perseverance in these difficult times and let's open it up to Q and <unk>.
[noise] [noise] [noise], if you'd like to ask a question simply press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please. Please press the pound keen on your telephone keypad, we ask that participants limit themselves to one question and one follow up question [noise].
Your first question comes from the line of Jeff Sprague with vertical research.
Thank you good morning, everyone hope everyone is fairing, okay. This situation.
Rich I am I missed the first 15 minutes or so of the call, but I'm I'm just wondering a couple of things your comments on refrigeration and the difficulty getting jobs done.
Are you seeing any other situations, where it's the opposite I mean fueling comes to mind were Oh, there's less traffic at the gas station, perhaps it makes sense to actually accelerate and get some of this worked on it.
Capitals already been budgeted.
That's first question I just have a follow up okay. On the first question did you I can answer it any better than the way you stated and I mean, the fact that matters that are in the retail fueling side, that's outdoor work. So there's.
More flexibility and it is a an industry that is I forget what they describe them as is important so I guess.
Are essential so we've seen obviously know slow down or any real material issues in terms on the.
On the retail fueling side and the refrigeration side, it's more indoor work.
And because of traffic restrictions and everything you see in the supermarkets going on I think it's understandable what's happening there.
And then just to be clear on what you're saying on restructuring.
So you're not increasing kind of act the 50 million.
Bucket, so to speak but you're doing these other actions on variable cost candy and the like is that is that correct are you actually stepping up restructuring and what's your scope to pull forward actions. You may have had on the table for 21 and beyond Okay. Well. The 50 is is solid so you saw the Ben.
But I think it was 13 million in Q1, we expect that to be relatively even through the four quarters of the year.
If you want to do the mathematics spot at the balance of it is not restructuring its cost containment actions of variable costs and unfortunately, the direct labor costs of one more for a lowering and then curtailing our operations, so and I wouldn't put it in the restructuring bucket because it's more volume.
And related as opposed to.
Permanent cost takeout.
And then.
Maybe along those lines.
Are there things that.
You know are not.
Not going to come back with the was bought with volume recovery of theirs.
The things you're doing in corporate or your view on travel in the future those sorts of things or should we expect all those kind of volume related savings to also swing the other way.
When we do get on the on the goods.
[noise] hard to say I think what happens with travel going forward from here, but I would expect that.
21 would probably be lower than 19, you're getting <unk>. If you want an opinion on it.
We are as we mentioned that we when we established a 50 million for this year that we're building up plans for another 50 million for next year.
Well see how we progress on that because the fact of the matter is with everybody at home working on some of our productivity plans has become a little bit difficult and we've really had to turn the chart here to deal with.
Immediate cost actions as opposed to longer term ones. So I understand your question I think let's get further into the year and I think there we can probably put some brackets around that.
Thanks, a lot good luck yep. Thanks.
Your next question comes from the line of John inch with Gordon Haskett.
Good morning, guys did you do going on for John.
Good morning learning.
Well I just wanted to clarify so.
There are some big unique thought it would be incremental E media and all of course, but could you give us.
How much would that be in Q2, and Q3 and how are you thinking about it.
Right.
Yes.
I would turn your attention to slide 12 in the bottom left hand corner of the presentation that we posted where it gives you are cost actions for Q2, we're not going to comment on Q3, yet, let's see how Q2 present, a progressive other than the fact that the 50 million.
Structural cost take out you can divide by four if you want a model into quarters than just for clarity as we said on the chart the the $50 million inclusive in the 6% down.
The Houston me, Okay, I give it okay and then one follow up could you give us that then breakdown of your fixed versus variable cost structure ideally well, though.
It's actually it's it's it's not a meaningful metric in consolidation. If this follow up quite a because the operating companies are so different in the profile I think I'd recommend that you get back as Andre for some follow up questions. There.
Okay.
[noise]. Thank you.
Your next question comes from the line of Scott Davis with Melius research.
Hi, Good morning, guys May Scott.
I know, it's early but is it impossible to think about start thinking about M&A here I am, particularly perhaps if there's distressed assets.
Like food equipment.
It's like that.
It's it's not impossible to think about it.
Distressed assets is really.
I don't know if that's our bailiwick I'm not taking it off the table, but if we were to go kind of what the timeline is in situations like this the first things that come available our distressed assets.
Everybody's got a hold on for a V shaped recovery to see if what happens to asset values and some of the things that we're looking at last year. So our expectation is what we'll see early on are gonna be distressed.
It's gonna have to be really attractive for us to pursue something like that Scott.
Yeah, I am just that and if you said it I apologize in here, but how how much down our the food equipment business orders. It I do like 90% or something we didnt see ordinarily I never like that or yeah. We didn't we didn't size it during the comments, but it's it's it's very material.
Okay fair enough. Thanks, good luck. Thanks.
Your next question comes from the line of Joe Ritchie with Goldman Sachs.
Hi, Good morning, guys. This is ronnies gardien on for Joe Ritchie <unk>.
Morning.
So just first on restructuring okay does the backdrop rain make it easier for you to execute on rolling out builder business services faster you operating companies.
Thank you just one follow up.
Well I think that anytime that you go into a situation like this that it heightens everybody's.
Focus on cost structure for sure.
But having said that implement implementation becomes more difficult with this stay at home. So it's it's a little bit more difficult as I mentioned in my comments about deploying.
Some of the people are around to our businesses start working on that but having said that.
In part of our year over year cost savings DBS is a foundational pillar [noise].
So we don't expect it to slow down at all going into the going through this year. What's your next question.
Okay, and then well across your portfolio to eat it could be or.
Dr.
[noise] well I think if you go back and you look at the slide that we prepared on slide 10.
[noise] gives you the best window of how the business is performing both from a demand point of view and what our operational stances I think that should answer your question that's more granular than.
Generally speaking, we given intra year comments.
Thanks.
Thanks.
Your next question comes from the line of Julian Mitchell with Barclays.
Hi, Good morning, maybe just help us understand I'm, what's happening in a fueling solutions you know the extent to which that Q1 bookings number the strength was maybe something of a blip.
Have you seen much in the way of push outs, so cancellations around U.S.M.B.
Investments or you're expecting those to occur.
We have not and right now we don't expect that we expect some a slowing in Q2, because we had to curtail our U.S. operations or at the beginning of April mostly due to.
I covered issue, where we had to shut the plant down otherwise, we would be up and running on the above ground side based on the backlog that you can see.
I see so on the demand front, you haven't seen too much disruption or in the U.S., even with miles driven collapsing and so forth.
No I mean, I think that you know as we mentioned that at the close all this last year and we said that there was one area with potential upside it would be.
That envy adoption has actually been accelerating into Q4 and that a continued into Q1 unless that stands changes. We don't have any reason to believe raw material slowdown now it's not gonna be absolutely the same quarter by quarter, it's going to move.
Based on orders order intake and everything else, but right now we go ended the quarter with a robust backlog I think they will have less production performance in Q2, but that's on us only because we've had to take the sites down as I mentioned.
Thank you and then my second topic I'm would be around D. I segments.
There is a very large amount of European demand exposure in that business, maybe just help us understand how the short cycle trends in European de <unk> or that segment globally. However, there has been trending in the very recent Pos well I think do we need to split that business.
Between the printing on I'd and then the textile ceiba textile side is under enormous pressure.
Oh, so much sell that I would expect that is going to have a difficult full year.
Just what's going on in retail operations on textile demand.
On the printing and I decide it had a good quarter, including Europe or because of fast moving consumer goods production and the amount.
[noise] consumables that we're shipping its difficult in terms of the actual printers themselves and on the maintenance side, but as you recall may recall that was a business is a business that we expected to have.
Or a significant improvement in year over year productivity because of management cost actions taken in Q4.
Great. Thank you very much thanks.
Your next question comes from the line of Andrew Obin with Bank of America.
Good morning. This is David Ridley Lane on for Andrew then.
What's been your experience on sort of the recovery in the supply chain and then any early demand recovery in China.
[noise] Oh, we we have I would say not material issues in our own supply chain side, I think that that and manifested itself earlier in Q1, when China was down it took a little bit for the freight side of it to unlock.
We have some challenges, but they're not insurmountable or comment and China is recovering, but it's a slow recovery in terms of the demand function.
And then on or near the potential for other curtailments during this quarter just sort of.
Trying to understand how large or.
Meaningful that could be in terms of the margin impact as you do you think about it.
Well I can't give you more information than we gave on slide 12.
Right. The curtailments are going to cost us between 35, an estimated between 35 in 40 million a fixed cost absorption alone. So that should give you an idea of the significance of the capacity curtailments, we're going to take out in Q2.
So I'm not going to size of more than that but we are going to manage this business not hoping for we're not burning down relative strength in backlog in Q2, we're going to make some bets on the linear verity of the demand and in certain cases actually.
Proactively cut.
Production to manage the working capital impact.
Understood. Thank you very much thank you.
Your next question comes from the line of Nigel Coe with Wolfe Research.
Thanks. Good morning can you hear me guys we can.
[laughter] look I apologize if somebody's question, you know people I'm trying to manage to to cool, but what.
You just free cash flow rich in terms of expectations for the.
For the full year, one source of cash from working capital and insight you know how that plays out through the years, just wondering obviously no unintended right now, but how would you expect cash depomed incident.
If you go would take a look at the.
The deck that we posted on 13, we expect a free cash conversion.
To be 100% of adjusted net earnings for the full year of 2020 and that is going to be influenced by depending on market conditions.
Liquidation.
Of the balance sheet.
Okay, and what do you expect that'd be a bit more backend loaded fit the silicon enough balance sheet cool.
Do you think doesn't have to be below the more.
Well I you know, what let's think positive for a moment not as backend loaded as in previous years, because hopefully we're beginning to ramp up production in the second half the year. So it may be a little bit more inverted because we're cutting production mid year, which we generally are not that's usually what our highest capacity.
Utilization is so.
We expected to be more cash generative.
From a working capital point of view I'm in the middle two quarters and lets think positive about Q4 and hopefully we're we're ramping up production in Q4, if any of you missed it earlier, we did tick down or.
Capex spending.
Expectation for this year and as it says you're on page 13.
You know, there's there's further flux there as well so in our prepared comments we talked about.
Our ability to continue to manage our free cash flow through this year with an expectation that we're going to deliver 100% against adjusted earnings. So how that falls now will depend on how fast we liquidate across the balance sheet.
Right. Thanks, but I think thanks, guys I I did see the capex, so I'm not completed lines, but the.
In terms of pricing you did point that the pricing.
This quarter, just wondering maybe just either the covenants into what you're seeing and what's the podium pricing and if you have any concerns that maybe pricing can you just say starts with the back healthier.
I think that we are concerned about it but we haven't seen any kind of crazy pricing in the marketplace as a general comment.
Okay. Thanks, very much rock.
Your next question comes from the line of Andy Kaplowitz with Citigroup.
Hi, good morning, guys.
Hi, Andy morning, Andy.
Rich just like following up on or I'd say knee and just sort of the progress you've made their way you know the automation project that I'm talking about the second half of the year, but to a stat. I think you know sort of talking about the comment you made a you know you expect.
Actual results in the business, but obviously stronger than that so how does that over time. He got a good backlog I get all sort of go together here as you go into the second half of the year I think he's got strong bell back which is good margin. So I guess you know instead of continuing to ramp up can you still do you know that mid teens margin.
Business or is it just tougher because of you know that mix demand environment.
The answer is Andy I don't know yet.
Right I it at the end to the end of today, we've got a backlog in the refrigeration business that we could run out in Q2 and get all the production performance and decently on margins in advance of the automation benefit which is in the second half of the year.
Based on the signals that we're getting from the marketplace and the inability for our customers to actually do these projects. We are proactively taking down production, it's down now as a matter of fact.
And our principal sites because it just doesn't make sense to get the production performance and build all the inventory right. So.
We'll see in the back half of the year, we believe that there's pent up demand in this business it's unfortunate because.
This was the year, we were hoping to kind of turned the corner and this covert messes as really put a nail through it. So you know over the longer term.
We're going to continue to work on the automation so that doesn't stop it's very difficult for me to say, we're sitting here today, what happens with the demand function, meaning did we just lose a quarter here and that volume is going to bleed over into 21, it's hard to say at this point, but I think it's a better than even.
Yet.
On the balance of the portfolio shore Belvac was we said it was going to be second half loaded and we believe that to be the case the ones that are more difficult to predict right now is swept.
Which is if you know there's been some earnings releases out an H.B.A.C. already so you know what's going on there the industrial footprint of H.B.A.C. in Europe has been largely down during the month of art March and into April So we need that to come back. So we can resume deliveries.
And in food equipment.
I think that we are just gonna have to retrench for a period of time until all of this locked down goes away because of the detrimental impact on on the restaurant business.
That's helpful and then I didn't hear your comments on engineered products, but maybe you can sort of talk about obviously a lot of business is in there. So how is that for instance, a B.S.G. dealing in the sense that seems like it's more difficult business in this kind of environment, you know cold and.
So you've got one about half of that business. That's auto focused in some ways. So maybe talk about because the difference between not business person waste handling and how the overall DP the difference between [noise] <unk>.
Look I V S G.
Being objective had a significant portion of their production shut in Q1 in Italy.
So the performance in Q1 from a margin point of view is excellent.
But having said that it is not those repair shops and everything else are not critical industries for the most Bart and are dealing with.
You know this whole stay at home phenomenon. So I think the management is proactively taking down production in V. S. GE in Q2 to manage its working capital itself.
But having said that that's aftermarket business, it's basically a miles driven and everything else and we would expect that.
And did not.
Be bad in the second half, that's our exit and that's where expectations right now some of the smaller businesses like Winches.
[laughter] <unk> as far as Winches and things like that.
That's gonna that's that's more tied to capital goods and that's going to go through a tough year.
Got it and on the waste handling side, a relatively I mean, you start to get back on their backlogs. Good I think that we're going to manage our capacity down in Q2 as I mentioned about burning down backlog until you get a line of sight I expect that business to perform well this year, but I think we're gonna take production performance down.
Comparatively a little bit in Q2.
Thank you guys. Thanks.
Your next question comes from the line of Josh Pokrzywinski with Morgan Stanley.
[noise] or maybe not Josh we gave you fine.
Let's go to the next go to the next one Okay. Your next question comes from the line of Patrick Feldman with JP Morgan.
Hi, good morning, guys.
Thanks for taking my questions.
Real quickly on the curtailments for the second quarter.
Thank you mentioned at 7% of your major global facilities are shut completely as of April 17th and 11% or partially closed.
Mark or lower capacity and I know, it's tough but is that is that a reasonable way to think about you know second quarter organic sales down maybe low double digit we're could it be much worse than that for any reason like is there a big destock in the channel that would impact you kind of more than we were seeing in industrial production like it just cure.
Just any color you could provide on that.
Yeah, that's a good college try to get Q2 revenue a look clearly.
Yeah.
The deteriorating conditions at the end of Q1 would say that they and the fact that we came out and said I think on one of the first bullet points that we expect Q2 to be the most difficult quarter of the year when imply that revenue is going to be down exasperated by the fact that we're going to cut production, so significantly, but I'm not going to sizes.
<unk>.
Okay, and and the I'm on the free cash flow maybe it could you.
Mentioned, I mean, we talked about capex coming down and you're managing working capital in a few different areas and then the filings also indicate to me about tax payments being pushed out maybe if you could address sustainability of the actions you're taking in how how we should expect some of this to revert on the other side when when things get better like is the Capex cut just a deferral of.
Certain things that'll come back.
I think there I think I think that the demand environment would have to change in excess of our forecast for the second half of the air for the Capex to come back so in a certain way I hope that we have to re <unk> four.
Forecast Capex back up at some point during the year, but unless the demand environment changes.
More than our forecast in a positive I've expected not to come up yeah, and the cash flow on the deferrals I mean, I think every company is going to see that.
Type of activity related around the X.. So you know it's not a major number it's not a big number but it is something then just speak.
There's also oh, even on your personal taxes, there's deferral of timing.
Would it still within a year, so there's going to be some aberration on that but nothing or nothing that changes our view on free cash flow for the year.
Okay, and then just Oh, sorry to follow up that first question since I didn't really getting answer yes. The schedule Curtailments, you said 35 to 40 million of reduction in fixed cost absorption and then underneath that on slide 12. It says 50 million of offset actions uncontrollable costs. So is the net number.
Her then.
15 million my taking the 50 minus that 35 to 40 to think about a year over year impact like so you're fully offsetting those curtailment. It's.
Yeah.
<unk> days, what's the Red is down you know you still got to come up with the you know that's the number you're missing there.
So the fixed cost absorption will offset.
Yeah, you lose you losing them on the reps down obviously right.
Understood. Okay did you know back pretty plants, that's a point in time that changes every day. So you know you're trying to enter blade something there I mean, I think we update that a week from now to be a different.
Number either up or down depending on what the situations in facts or or in any any a geo around the globe.
Yep totally understood I appreciate the color. Thanks, much guys. Good luck.
Your next question comes from the line of Deane Dray with RBC capital markets.
Thank you good morning, everyone.
Good morning, I deem Hey, rich I know, it's still early but I was hoping you could look ahead and talk about what you think might be some of the secular changes.
From the pandemic on how would impact dover's business is any specifics come to mind, we've heard some general commentary about more reinsuring I'm not sure that makes sense, maybe carry more buffer inventory, but how do you think this changes the structure.
Of the organization and some of the emphasis and I'm working capital and so forth. Yeah, I think deem that that we Dover is made up by a collection of medium sized companies that don't really have the longest supply chains.
So I think that some of the anecdotal comments about what's going to happen from bigger vertical industrials really don't apply to us to the extent that there is reassuring.
In a certain way I hope sell because that's too are benefiting a lot of cases for some of our components businesses.
But then on Dover specifics you see any longer term changes in retail fueling on like commuter behavior as well as the supermarkets, maybe shifting to more warehouse type operations for food delivery anything on that.
Funds not anything different than we would have thought going into this crisis no I think that.
No.
I don't need as anything secular other than what we've been always watching at the end of the day and I would argue that.
And the at least on the food retail we would think that we're turning the corner that it's more in our favor going into the future, but we'll see.
Got it and just last one for me no surprise that you're maintaining the dividend and maybe you just to expand on the buyback a decision.
On a stopping for now how much of that is and I consideration of liquidity preservation argue influence at all at some of the political backlash that's associated with buybacks here, it's all liquidity.
Okay. Thank you very much and when we get to these next two quarters you know what hopefully that everything's fine and then we can go back to have a capital returns through this thing it's a smart thing to do right right.
Got it thanks, guys best of luck.
Thank you.
The last question comes from the line Mig Dobre with Baird.
Oh, great. Thanks for squeezing me and good morning, I, but I want to go back to the disclosure you provided I like that where you talked about the geographic detail and I'm just sort of big picture wondering here I mean this whole cobot issue started started in Asia started moving west where from their hitting Europe impacting us now.
When you sort of look at your business is it is it fair to expect that the U.S. could be following a pattern similar to Europe or maybe even down the line Youre Your Asia business in terms of growth or do you think that there are some particular offsets in your business mix or operation that would that would make you a look different than the other jogger.
I would think that it will follow the same pattern, but I'd be careful about using the quantum of the percents only because of our participation in different regions.
Like the law of small numbers, but without question and we were tough we were talking about when we put the slide together, it's likely you can almost watch this covert 19 travel the world.
Oh, and we would expect that with the Lockdowns that we had late in Q1 that are in exist today that that same pattern would would come to the U.S. or North America.
So I'm sorry, the pricing on that but I'm I'm trying to understand it yeah, Europe right now with a better benchmark.
Well I know I, let business <unk> age or not I, you know you can't only because the numerator and denominator is are all different. So you have to be careful about just using the percentages and saying well, which one should I pick the 19 or the seven it's because we talked about you know even the fueling.
Business in the U.S. skilled strength and continues shows friends. So it's not not the same whenever you go in terms of.
When I go back to the that comment I made before make no mistake Q2 is gonna be tough right.
Right and that's why intervening on their production base.
So we didn't you know.
[noise], what I mean do you want to be aren't you can put on it but it's going to be a different.
We we all understand that we're just trying to do our best on the outside to try to get a number that both as we can and thinking would fueling here.
Your your orders were up nicely. Your backlog is up nicely you sort of think about your business versus the initial expectations that you set up for the year being up you are the 2% I'm just sort of wondering what has worked out different than your expectation then where do you think we are right now in terms of the upgrade.
Michael in terms of penetration thanks.
You know what we haven't had the time to run those penetration numbers I think when we put the forecast together for 20, we said if there was one segment that we thought had some upside it was going to be fueling solutions because of the order trends that we saw in Q4 about envy adoption clearly that is held.
In Q1.
So it's better than we would expected, but it was it was within the window of our forecasts, but as you know we've always been.
No we spent a year or trying to push this adoption rate out and now it seems to be accelerating whether that holds for the year I hope, so, but we'll see but.
But that's what's driving the backlog.
No I I I understand that part I'm just wondering if we're in a third the therefore, the seventh inning of the adoption cycle I don't know.
I don't know like I said, we haven't had time to but everything that's going on we haven't had time to size. It from a total market and as we've said.
Numerous times from a revenue point of view, it's all over the map depending on whether you're doing full dispenser units are just kits.
[noise] alright, thank you guys. Thanks.
Thank you that concludes our question and answer period for Dover's first quarter 2020 earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.
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