Q3 2020 Dover Corp Earnings Call
[music] good morning, and welcome to Dovers third quarter 2020 earnings Conference call.
With me today are Richard Jay Tobin, President and Chief Executive Officer, Brad Cerepak, Senior Vice President and Chief Financial Officer, and Andre Gallium Vice President of corporate development and Investor Relations.
After the speakers remarks, there will be a question and answer period. If you would like to ask a question. During this time press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key on your telephone keypad.
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Thank you I would now like to turn the call over to Mr. Andre Gallium. Please go ahead Sir.
Thank you Laurie good morning, everyone and thank you for joining our call. This call will be available for playback and the audio portion of this call will be archived on our website for three months.
Our provides non-GAAP information and the reconciliations between GAAP and adjusted measures are included in our Investor supplement and presentation materials, which are available on our website.
We want to remind everyone that our comments today may contain forward looking statements that are subject to uncertainties and risks, including the impact of COVID-19 on the global economy, our customers suppliers employees operations business liquidity and cash flow.
We caution everyone to be guided in their analysis of door by referring to our form 10-K and form 10-Q.
For the third quarter for a list of factors that court or 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 Andre.
Let's begin with the summary results on page three as we guided back in September.
July August trends were positive and we were exceeding our internal forecast. This dynamic continued through September.
In addition to the improving demand environment, we were very encouraged by our manufacturing operations and supply chain performance in the quarter.
The solid operational execution had to tangible benefits in Q3 first it increased our capacity to deliver a higher volume than expected from the backlog in our.
And our long cycle businesses and as you see the positive impact to the top line.
Second through a combination of mix and fixed cost absorption it drove a robust margin performance for the quarter.
Demand trends continued to improve sequentially across most of the portfolio. The trajectory continues to vary by market and I'll talk more about that but our diverse end markets and geographic exposure, it's clearly an asset to us in the downturn.
Revenue declined 5% organically and bookings were flat with a third of our operating companies posting positive year over year bookings for the quarter and more than half posting positive comparable growth in the month of September we're now.
We're not out of the woods, yet, but the trajectory is encouraging and we continue to carry a healthy backlog going into the fourth quarter and into next year.
We delivered strong margin performance in the quarter and year to date, we achieved margin improvement in the quarter, Despite lower revenue driven by our operational multiyear efficiency initiatives gaining.
Gaining further traction and by improved business mix some of which we highlighted our recent investment day focused on the pumps and process solutions segment.
And bio pharma business in particular.
With the strong results to date, we expected to overload over deliver on our full year conversion margin target and are now driving towards achieving a flat consolidated adjusted operating margin for the year.
[noise] cash flow in the quarter was strong at 17% of revenue and a 127% of adjusted net earnings year to date.
Year to date, we have generated 117 million more in free cash flow over the comparable period last year.
Moving to our robust conversion conversion management and capital discipline.
As a result of our performance in the first three quarters the year and a solid order backlog, we are raising our annual adjusted EPS guidance to $5 and 42.
Two $5 or 45 cents per share.
We're not in the clear on the macro backdrop and performance remains on even between markets, but we believe that our performance to date and the levers we have in our possession, who will enable us to absorb any possible dislocations in the fourth quarter should they materialize.
Let's move to slide four.
General industrial capital spending remains subdued in Q3, resulting in a 10% organic decline for an engineered products driven by softness in Capex Levered industrial automation industrial Winches and waste handling.
Additionally, our waste handling business had the largest quarter ever in the comparable period last year, making it a challenging benchmark.
On the positive side aerospace and defense grew double digits on shipments from a strong backlog and we've seen robust recovery in our vehicle aftermarket business after a difficult couple of quarters.
Productivity actions cost actions and favorable mix minutes minimize margin erosion in the quarter nearly offsetting the impact of a materially lower volumes.
[laughter] fueling solutions saw continued albeit sequentially slower growth and above ground equipment in North America, the compliance and regulatory activity.
Whereas national oil companies and countries in China continued for capital spending amidst ongoing uncertainty today.
Demand for below ground equipment has improved sequentially as construction activity restarted, but remain subdued globally and it's.
And in China, we're still weathering the roll off of the double wall replacement mandates.
Margin performance in the segment was very good and a testament to the operational focus and capability of the management team and has achieved through productivity improvements cost controls and favorable regional mix more than offsetting volume under absorption.
[laughter] sales in imaging and identification declined 8% organically due to continued weakness weakness in digital textile printing, we've seen improving demand for textile printing consumables.
Reflecting recovering and printing volumes, however has been insufficient to prompt fabric printers to invest in new machinery, we expect conditions to remain challenged for the balance of the year Mark.
Marking and coding was flat on strong demand for consumables and overall healthy activity in the U.S. and Asia, Despite lingering difficulties with customer site access and service delivery.
Despite segment margins being down relative to the comparable quarter, driven by digital printing volume and fixed cost absorption margin improved in marketing coating on flat revenue as a result.
Of the mix effect on consumables and operational initiatives undertaken in prior periods, which also provide a solid base for incremental margins in 2021 as textiles recover.
Pumps and process solutions continued to demonstrate the resilience of its product portfolio some of which we highlighted last months analyst and Investor day.
Strong growth continued in Biopharma medical anti genic applications play.
Plastics and polymer ship several large orders from its backlog, which were initially slated to ship in Q4 getting it to a slightly positive revenue performance year to date.
Compression components and aftermarket continues to be slow and weaker activity in U.S. upstream and midstream industrial pumps activity remained below last year's volumes, but has improved sequentially.
This was another quarter of exemplary margin performance in the segment with more than 300 basis points of margin expansion driven by broad based productivity efforts cost controls and impacted businesses favorable mix in pricing, which more than offset lower volume in some of the portfolio.
[noise] refrigeration and food equipment posted its first quarterly organic growth since early 2019, which is a welcome sign in line, what we saw exiting the second quarter.
Moreover, the account the recovery was broad based our food retail business the largest in the segment grew organically and restarted remodeling activity in supermarkets.
Novak or can making business began shipping against its record backlog, which we believe is in the early innings of a secular growth trends.
Heat exchangers were approximately flat with continued weakness in H.B.A.C. offset by strength in residential and industrial applications, including semiconductor server and medical cooling come.
Commercial foodservice improved margins remain impacted due to continued weakness in institutional demand from schools and similar venues while activity in large chains has slowly recovered.
Cost actions taken earlier this year as well as improved efficiency and volume more than offset the demand headwinds and food equipment, resulting an appreciable margin accretion.
We expect to continue delivering improved comparable profits in this segment in line with our longer term turnaround plan.
I'll pass it to Brad from here, Thanks, Rich good morning, everyone.
Let's go to slide five.
On the top is the revenue bridge as rich mentioned in his opening remarks, our topline continues its recovery.
With each segment posting sequential improvement over Q2, silver or businesses, putting plastic polymers beverage can baking and food retail returned to positive organic growth in the third quarter, while bar bio pharma continued its strong growth trajectory from prior quarters.
Yes, sex, which had been a net revenue headwind for us since mid 2018 flipped in the quarter and benefited topline by 1% or 12 million driven principally by a strengthening of the euro against the dollar.
Acquisitions more than offset dispositions in the quarter by 3 million. We expect this number to grow in subsequent quarters.
The revenue breakdown by your geographic area reflects sequential improvement in each major geography.
But particularly encouraging is the trajectory in North America and Europe the U.
The U.S., our largest market declined by 4% organically.
Due to softness in waste handling industrial winches and precision components, partially offset by a strong quarter in our above ground retail fueling marketing coating beverage can making in food retail businesses among others.
Europe declined by 4% organically a material improvement compared to a 19% decline in Q2, driven by constructive activity in our pumps bio pharma in hydrogenics and plastics and polymer businesses.
All these should decline, 10% organically, while China, representing approximately half of our business Asia post.
Posted an 8% year over year decline.
We continue to face headwinds in China in retail fueling due to the expiration of the underground equipment replacement mandate and slower demand from the local national sales.
Outside of retail fueling we saw solid growth in China.
Moving to the bottom of the page book.
Bookings were nearly flat down 1% organically year over year compared to a 21% decline in Q2.
Reflecting continued momentum across our businesses.
In the quarter, we saw organic declines across four segments, but sequential improvement across all segments.
And a particularly strong bookings for for for our for duration of food equipment segment drift.
Driven primarily by record order intake in our kitchen, making business.
These orders related to large projects that were mostly projected to ship in 2021 and 2022.
Overall, our backlog is currently approximately 200 million or 14% higher compared to this time last year positioning us well for the remainder of the year and into 2021.
Note that a material portion of the backlog increase was driven by orders in our K, making that business, which I've mentioned above.
Let's go to the earnings bridges on slide six.
From the top of the chart. Despite a 77 million revenue decline in the quarter, we were able to keep our adjusted segment earnings approximately flat year over year, a testament to our proactive cost containment and productivity initiatives that helped drive a 100 basis points of adjusted EBITDA margin improvement.
Some of the recent initiatives will continue supporting margins into 2021.
Going to the bottom chart.
Adjusted net earnings declined by 3 million, principally driven by higher corporate costs related to deal fees and expense accruals, partially offset by lower interest expense and lower taxes and lower earnings.
The effective tax rate, excluding discrete tax benefits is approximately 21.5% for the quarter substantially the same as the prior year.
Discrete tax benefits quarter over quarter were approximately 2 million lower in.
In 2020.
[noise] Rightsizing and other costs were $6 million in the quarter relating to several new permanent cost containment initiatives that we put forward into this year.
Now on slide seven.
We are pleased with the cash performance with year to date free cash flow of 563 million $317 million or 20.
Last year, our teams have done a good job managing capital more more actively in this uncertain environment and.
And with the improving sequential revenue trajectory in the third quarter, we rebuild some working capital to support the businesses and our customers.
Free cash flow now stands at 11.5% of revenue year to date go.
Going into the fourth quarter, which is traditionally which traditionally has been our strongest cash flow quarter of the year with that let me turn it back to rich. Thanks.
Thanks, Brad I'm on page eight [noise] Scott.
Lets go segment by segment and EPS.
In engineered products, we accept similar performance as the third quarter vehicle aftermarket had a very good Q3.
As the business was able to deliver on pent up demand.
Notably we have a tough comp in Q4 due to do do some promotional campaigns, but this is a business which has excellent prospects for 2021.
Activity in waste handling is picking up a private haulers, but orders placed are mostly for 2021, we expect mucin municipal volumes remain subdued for the balance of the year demand.
Demand is reaccelerating in for digital solutions in the space and overall, we are constructive on the outlook for this business into 2021.
We're seeing some encouraging signs in industrial automation and automotive OEM markets in particular in October.
Space and defense continues to be steady most of what we plan to deliver in the next quarter isn't the segment's backlog. So we don't expect.
Material upside and or downside from our forecasts, we expect margins to be modest modestly impacted by volume and negative mix relative to Q3, largely due to demand seasonality.
Fueling solutions remain constructive finished the year and into 21 as we've been guiding all year, we have a tough comp in Q4 due to record volumes in the comparable period. Despite the top line headwinds, we expect to hold year over year absolute adjusted operating profit as a result of our efforts done on product line harmonization productivity and pricing.
Discipline, we expect 2021 to be a good year as demand trends remain constructive for our above ground and software solution businesses and we turned the corner on below ground fluid transfer and vehicle wash.
Imaging an idea should remain steady we saw robust activity in marking and coding exiting the third quarter.
And the backlog in the business is higher than last year activity and serialization software space is also picking up nicely and digital print demand for inks has picked up which is a sign of improving printing volumes. We are seeing a pickup in quotations for new machines, but we expect a few more quarters before we return to normal levels in this market.
In pumps and process solutions, we expect current trends to continue.
Biopharma plastics and processing continues a robust trajectory and pumps recovering to more normal levels, particularly in defense and select industrial applications.
Compression product lines within the precision components exposed to mid downstream are likely to see continued weakness in Q4 as projects and maintenance continued to be deferred overall, the pumps and process solutions outlook is supported by segment backlog that is in line. What we had at this point last year.
Let's get on to the last segment refrigeration and food equipment first as said we are in the early innings, what we believed to be a multiyear secular buildout of can making capacity as evidenced by our backlog driven by the transition from plastic to aluminum containers and also the spike in demand for cans at home consumption of food and beverages.
In food retail, we delivered low teens margin for Q3, converting our backlog, providing us a baseline to reach our 2021 margin aspirations. Our backlog is beginning to build moving into 2021 as you. All know this is a seasonal business. So Q4 volume and fixed cost absorption declines in Q4.
And frankly, it's all about 2021 from here and Q3 was a sign of good progress.
We have a robust backlog and heat exchangers in our constructed constructive in this market.
Passive expansion projects are being completed and we have some interesting new products in the pipe.
Finally in commercial foodservice large chain should continue to support activity, but were not fully offset weakness on the institutional side.
Overall for the segment comparable profits and margins for the segment are forecasted to be up in.
In Q4.
[noise] into the to the comparable period.
With strong margin performance to date, we didn't do we intend to deliver approximately flat year over year adjusted margin. This year. Despite a lower revenue base as you may recall, we entered the year with a program.
I'm, telling $50 million and structural cost reductions as part of a multi year program highlighted at our 2019 Investor day, we add.
We actually more structural initiatives, which resulted in approximately $75 million of permanent cost reduction in 2020, leaving a 25 million dollar annualize carryover Bennett benefit into 2021, we view this as a down payment on the 21 21 portion of our multiyear margin improvement journey.
And we'll update that with more to come on 21, when we report the fourth quarter, we expect robust cash flow. This year on the back of solid year to date.
Cash flow generation and target frequent cash flow margin at the upper end of our guidance between 11% to 12%.
Capital expenditures should tally up to approximately $150 million for the year.
With most of the larger out rate outlays behind US information, we are raising our adjusted EPS guidance to $5 $45 and 45.
Cents per share for the full year.
Above the top end range of our prior guidance.
We remain on the front foot in capital deployment posture with several bolt ons close last quarter, we have multiple opportunities in the hopper.
I hope to report on that soon and as usual before wrapping up I want.
I want to thank everybody at Dover for their work and continued presence in these uneasy times and with that Andre Let's go to the Q and a.
Thank you I would like to ask a question.
Ask the question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key on your telephone keypad, we ask that participants limit themselves to one question and one follow up question.
First question comes from the line of Steve Tusa of JP Morgan.
Hey, guys good morning.
Thanks.
I'm just trying to reconcile the kind of Fourq guide here I mean, I didn't really hear when you walk through the segments. There wasn't really anything that suggested that you know any one of these segments are at least in total are going to be down materially year over year, yet I think your Fourq guide implies.
Decline EPS.
And I understand tax rate's going to be a little bit higher maybe that's like seven or eight cents, but is there anything that that we're missing there I mean refrigeration is usually the most seasonal and the backlog. There was like you know pretty eye popping Lees strong. So anything we are missing or is this just a bit of conservatism.
Well I would have hoped that when we did the investor day in the middle of the quarter that were pre.
Pretty forthright of what we thought the Q3 was going to be and we would have hoped.
That estimates for Q3 would have moved up and that Q4 would have moved down and weve gotten either so here comes the Q3 is great, but Q4 is going to be a miss a narrative.
[laughter].
[laughter] that's not that's not that's not from me just just to be clear I don't know that was a general comments that was not able to do at all so.
Okay.
No we have a bad carbon DFS, which we've been highlighting all year just because of the fact that if you recall, we had a bunch of orders last year, we had some operational issues in the Q3. So we shipped a ton in Q4, that's always been hanging out there.
We over delivered to our this year's forecast in vehicle services group, which is a lot of the reason that we did.
We did a lot better in Q3. So if you think about automotive aftermarket we had a couple of really poor quarters. We had a lot of pent up demand I think operationally, we hit the ball out of the park and delivered and over delivered what we'd expect are forecast to be.
So that gives us.
Sort of a negative comp going into Q4.
Despite the backlog in refrigeration I think I would caution you on the segment backlog, while we're building backlog in refrigeration for 21 deliveries.
That backlog figure is material.
Materially impacted by the backlog that we have at Belvac, which is over $200 million worth of deliveries. So.
And finally, we're still getting Kobin reports, particularly in Europe. So I think there is an amount of prudence about how are we going to have to take facilities down our certain regions of Europe going to be impacted from a demand cycle.
So I don't think it's bad news at all and quite frankly in some of our higher capex businesses like waste management, we're getting orders for 21, clearly we could build that product and get the industrial absorption, but I've got absolute confidence in our management team that lets manage our inventory in Q4, and we start up next.
This year.
With high build rates. So overall is there some conservatism in there sure there is and that's until we get on the other side of this covert issue will.
We will continue to operate under that stance.
But is there anything going on in terms of any particular market getting worse from the trajectory that it's on no absolutely not yeah. Just a specific follow up on that I think you said hold year over year absolute profit in your comments. It DFS for for Q does that mean does that mean that flat or was that just say, we'll hold within a range and then just to be clear.
Sure on Bell back is that still a pretty profit.
Pretty profitable business.
The absolute profit comment was for the full year of DFS, So margin benefit outweighs topline decrease okay.
And on fell back it is accretive to the segment margins. We are beginning to do a transition to sales to a higher mix of turnkey projects. So there's some pass through revenue.
So I think it'd be a little bit careful about the assumptions of belvac, but we'll take it because quite frankly its approved it's it's accretive to the segment for sure.
Right. Okay. That's it thanks a lot thanks.
Your next question comes from the line of Scott Davis of Melius Research.
Hi, Good morning, guys Scott Corning.
Rich you Didnt talk about.
About M&A markets at all in your prepared remarks, I, just wonder if there's any bit of an update on.
Hi, either activity out there that you're seeing or opportunities or valuation or anything that you might share with us.
It's not a lot different than it was at the end of Q2 and there are some opportunities out there.
Valuation continues to be reflective of the public markets. So despite you know.
As you know even private companies are trying to see through the downturn of 20 I want to be paid on 21.
So it's pricey out there.
Lot of competition in terms of private equity.
But having said all that on some of the more nishi opportunities that we have we're feeling good about.
Some of those opportunities there some of which we highlighted turns the pumps and process solutions day.
We did mid month so.
You know, we've got a pretty good list of candidates, but we're not going to overpay and you know and I think that some of these deals are taking longer because as you can imagine do.
Due diligence under pandemic is a is a bit difficult.
Oh I'm sure it is sales.
Just moving on to kind of.
Curious on your opinion on capital spending you know there is oh.
A lot of uncertainty out there you've got no election, you've got pandemic that.
Obviously, I know of but at the same time money is cheap then.
You know I'm no better time to invest ahead of a recovery I suppose so are your customers delaying capital spending is this kind of a normal down cycle, a response and we'll see a quick recovery or detectors.
Yeah, any sense that things can be a little bit different and people delay a little bit further just given perhaps.
Perhaps higher corporate tax rates and other noise that's out there.
I look at the I guess my overall comment is there is there is a bit of seasonality and I'm just.
I'm, just not going to do the project in Q4, because I can do it in Q1 of next year.
The general commentary, if I exclude kind of some of our businesses like textile digital print which has some.
Some secular headwinds associated with it which are particular, what we're hearing from our customers is a desire to spend in 2021 on productivity Capex, which generally speaking is.
Makes up about 85% of our portfolio so going into 21 as you can imagine we're beginning to start to do the forecasting in the budget.
You know we feel good about of a lot of our businesses I think it's like if you take something like waste handling right now.
The municipalities are going to sit on their hands now until they see what their budgets are for 21, but on the private sector. We just think that.
We could build off our backlog now if we want but I don't think there's any reason to do so and we'll hold our powder dry manage our working capital and come out at the beginning of the year and high build rates.
Okay. Thank you rich good luck. Thanks.
Our next question comes from Jeff Sprague of vertical research.
Thank you good morning, everyone Jeff.
They are two things rich first on on pumps I mean, the margins were extraordinary you you know you mentioned a little bit of a revenue pulled forward.
You know was there some kind of additional mix or volume dynamic there and how should we think about the margins in this segment going forward.
Yes there.
And we would have to be careful about promising margin accretion from here I guess, we just take it an absolute revenue growth.
But look my comments on the on the quarter was on the long cycle side, which is particularly mug.
Timing those revenues is always difficult because of the size of the orders and you're dealing with letters of credits and a variety of things, but my opening commentary as it.
As a general statement I think that the operational performance of the group in Q3 was excellent I think that we're really beginning to get some traction and this is across the portfolio.
In terms of what we've been working on.
On operational efficiency and supply chain and look at Maag built the product. It was ready to go and we are paid and out the door. It goes so and that generally speaking is margin accretive and you couple that with the fact that the trajectory on the Biopharma side can you.
Continues on and you get the margin performance that you see here.
Interesting and then maybe a two parter on.
The RFP, if I could actually.
So we're seeing actually a very strong results out of some of the food retailers all albertsons today actually is.
Is there any particular.
Unusual issue with access at this point, obviously, we've got seasonality but.
You know how do you see that playing out and then just a little bit more on bell back.
Are you just seeing kind of I don't know kind of conceptually.
The.
What's being flipped on plastic.
The aluminum that something similar dramatically change in the in the thinking of your customer base here.
I'm sure, let's let's deal with Belvac first I'll flip the answer.
Capacity has been extremely tight.
It was tight in 2019, and then Cove and flipped it over in terms of the demand function I think about beer right no one's consuming keg beer, it's all flipped into cans. So there's been a surge in terms of can demand and if you go look at some of the bottlers they've been pitching about can pricing for some.
Time. So here comes the capacity wave. These are big projects. So the planning period to get them up and going we've known about them coming I would say for a year now, but I think the covert really drove the demand. So you've got the cobot issue in terms of the transition to kind of more at home if you will.
Overarching all that you have this issue with P.T. and Recyclability and a variety of other things. So that's why.
You've got a pull forward in terms of this massive capacity expansion.
Being announced which is driven by the shorter term demand cycle, but I think that the can.
Can makers would tell you that they believe it's secular because they think that they have an advantage from an environmental point of view. So for US we think that this is.
You know two to three years minimum in terms of the secular trend for us in particular on the machinery side.
Factor refrigeration look we we expected this year to be better I know, it's a low bar in terms of the demand function and we got net.
Negatively impacted by covert because of access rights.
And everything else.
We ran a capacity in Q3 as I mentioned in my comments, we did low teens margin for the.
For the rich refrigeration pieces of business, which is a good harbinger in terms of what we're capable of doing.
Level loaded.
Q4, it's all about there's a seasonality portion of this business you generally don't do store refurbishments going into the Christmas season, because I think it's going to be a stay at home Christmas clearly so there.
So they're going to protect their infrastructure.
But we are beginning to build a backlog for 21 delivery now so.
So you'll see some under absorption in Q4 as I mentioned in my comments, it's all about 21 for us here.
Great. Thanks.
Your next question comes from the line of Julian Mitchell of Barclays.
Hi, Good morning, you mentioned just not a rich is still about 21 and fully agree maybe on that point slide eight or nine.
Nine I suppose you know you gave a little bit of color on the.
The cost savings and that.
And that 25 million carry over into next year I'm, just clarify perhaps that you know there will be extra cost saving measures on top of that that we probably hear about a Q4 earnings and also any way to size. The return of some of those temporary cost outs that are.
No.
Semi permanent you know just trying to understand any magnitude on that for next year.
To your first question, we said that we were going to we were it was a three year program of $50 million a year, we've pulled forward.
20 to 25 million into this year. So you get a calendarized carry over but the fact of the matter is we've got enough in the pipe that we're confident that we'll get.
The 50 and to the extent that we can work hard on it we'll get kind of the roll forward of the Calendarization Carryforward and 21, that's what I can say about terms of absolute structural cost takeout.
On the temporary side I think that we need to be careful because.
A lot of the temporary was based on their furlough legislation that was available okay and that is going to be dependent.
Volume, so, let's kind of put that aside for a moment the rest of what we can call temporary or controllable isn't the SGN a side.
Look at the end of the day, we we'd hope to build up build back comp so thats a headwind.
But I think that's important for morale around here, but on the other hand, clearly on a t. any and some of the other things I do not expect us to come back to 2019 levels no matter what the revenue profile as were 21. So look at the end of the day Joanne is going to be embedded in whatever guidance. We give you for 21.
But we don't expect a full snapped back to kind of 2019 comp SGN a levels.
I understand that anything rich you could remind us on around kind of normal operating leverage that we should expect for assuming next year revenues.
But not dramatically lets say, yes, it's it's like we have a wide range of margin profiles between the businesses.
And depending on what the starting point is then the leverage is going to be different. So when you know you heard the question before about pumps and process solution I think it's fair to say that you're not going to get a lot of fixed cost absorption out of that particular segment, but any revenue that we get at current gross margins is going to be highly accretive.
So we look at it that way for that particular business as opposed to.
Digital textile printing, where you've had a very difficult time this year.
We think that that be operational leverage when that comes back is going to.
He is going to be in excess of gross margin level. So it's a bit of a mixed bag depending on the.
The current trajectory between 20 and 21.
That makes sense and maybe just on the revenue line then for next year DFS I think you'd mentioned.
Good outlook for next year right.
Suppose that the bookings have been tough to courts is probably tough again in Q4.
And you have this question marks around US, yes, the that that always get little top so maybe.
Maybe don't focus too much on that specific piece, but maybe help remind us why you feel good about the DFS topline next year I'm glad you asked that question because as we mentioned we did when we did the investor day for pumps and process solutions that we were going to do another one this year, we will be announcing shortly.
Another.
Virtual Investor day, which we will concentrate on the fueling solutions business and hopefully answer all your questions about 21 trajectory and what we think the strength of that businesses.
Understood. Thank you thanks.
Your next question comes from Andy Kaplowitz of Citigroup.
Good morning, guys morning, Andy.
Rich can you give us more color into the progress you've been making in refrigeration turns in margin and one point before the pandemic you talked about hitting that 15% you did have double digit margin quarter for the first time in over a year, but looking out into 2021 have you seen enough from them in terms of execution that segment and what you have in backlog you talked to.
Belvac. So you get continued sort of nice margin improvement and you can hit those goals that you set for yourself.
No we're not all the way there yet we're not getting the benefits of the automation in terms of the labor content. So we we actually got too low.
Teens margin low.
Low teens margin in the quarter without that so everything is pointing up I think.
It is purely going to be a function of the demand profile of the business for 21, what we can see right now what we hear from our customers I think it's going to be.
Proactive for 21, so meaning it looks like.
Barring another wave of covert that revenue should rise refrigeration next year, and we'll get the benefit of both the productivity and the operational leverage.
So.
We're not it's not all in the in the bag yet but.
We're we're cautiously optimistic based on what we've seen in Q3 and I would not panic about Q4, just because of the negative leverage that we're always going to get in that segment like I said, it's all about 21 from here.
Got it and then Mitch you mentioned, you're going to have that DFS analyst day, but if you step back I mean, you had 14% backlog growth as you mentioned you some pretty constructive about 2021. So as you look out are there any businesses other than DSS that you're more worried about or do you actually have pretty good that backlog visibility at this point, maybe even better than.
Average toward growth in most of your segments in 2021, Oh, we worry about them all.
Bought I think I mentioned, a few I think that I think that we have been.
Proactively prudent in EPS G by cutting capacity early just because of this municipal issue. So we would expect to carry some negative leverage from 20 into positive leverage in 21, we feel really good about vehicle services group for 21.
Based on.
Mostly dry or you know the amount of miles driven the amount of used cars that are out in the fleet and I think that management is got a lot of really great productivity initiatives in the pipe coming there.
Let's see I mean, I don't want to go through them all one by one refrigeration. We talked about you know we'll be cautious on digital printing, that's probably going to be a second half of 21 in terms of the upturn.
And look at a fan of pumps and process solutions. Just can continue that trajectory that they're on that is absolutely satisfactory. So you know we're not out of the woods.
Got some business in terms that are that are highly leveraged towards capex, it's little bit of a wait and see but you know our we're in the process of doing 21 forecasts and.
And we feel good about the demand function and we feel good about the rollover of our productivity initiatives going into next year.
Appreciate it guys. Thanks.
Your next question comes from the line of John Gordon Haskett.
Oh. Thank you good morning, everyone, Hey, rich picking up on the answer on refrigeration. So kind of went back over he notes here I think originally you had said the food retail automation project was going to reduce.
Labor hours by 50%.
When it comes to SK use from 400 to less than 100, you're talking about dramatic declines in base permutations.
The Doctor has been realized and you mentioned that the the 50.
50% labor wasn't really necessarily in that so does that mean that that's on the come because its a matter of timing or perhaps the parameters for expectations or cost out or whatever change to any kind of more color on that automation project would be would be helpful. Sure I mean, where we are.
Slightly behind in terms of the automation, just because we couldn't get contractor access for.
For a period of time into our sites, so that kind of gummed up the process, a little bit where men.
We're making good progress in terms of skew management, but that is also a function of the demand cycle and somewhat a function of us getting the automation up because you need to kind of sell the benefits the automation to your customer because those are the ones that you are convincing to read to change the skews at the end of the day.
So look I think that we're probably taking Q3 into account we're half way, where we would expect it to have been under on more normal 20 conditions I guess I can answer it that way.
No that makes sense do assuming that the demand trajectory continues.
Where do you get to the point, where you say alright automation is done and now you're getting the full bore.
The cost benefit or the productivity drivers toward say variable contribution from future volume uplift that sometime mid next year or.
It would it would be at this is you know it's a bit of a.
A reverse barbell. So it would be Q2, and Q3 of 21, where we would expect to see the tangible benefits.
Okay, and then I just want to ask you about when telecom volunteered just went public and they talked about 2020 is the peak year for M.D., you talked about even be being strong this quarter as they did I'm sure.
I'm curious if you would concur with that so 2021 is an absolute rabbit, new drop off and strategically is wait until kind of considering say branching into what electric vehicle infrastructure to diverge.
To diversify the petroleum footprint to a greater extent I know you've got this alliance with charge point. It doesn't look like there's a revenue or profit sharing.
Mechanism with that but what are your thoughts rich just strategically on and I realize these very far out, but you know markets discount the stuff and worry about it sooner versus later.
Are you thinking about it and John I don't want to I don't worry about hey, I don't want to take away from all of the effort that the management team is undertaking right now.
Prepare for this Investor day in November, which should answer all of the questions that you just asked I think the only thing that I will say that there was some talk about sizing the headwind for 21 I would caution you that that.
That envy as a north American phenomenon and our exposure in terms of the North American market is different than.
Then so I think you have to get that size that appropriately and that our product mix between above ground and below ground is significantly different you know we've been carrying around a pretty weak below grounds market. This year right. We had we had talked about the headwind that double wall for China. When we give the guidance for this year, but then your.
Ran into kovac with access rights and construction and everything else. So.
At the end of the day sure margins are up some of that is driven by U.M.V. demand for sure, but I don't want to take away from the productivity improvement that the management has done here that has has driven margin accretion despite.
The topline so what our thoughts are and 21 I'll leave it to November when we get to it is that the NV headwind.
Is manageable to the extent that the below ground business returns to growth.
In 21.
Perfect I'll leave the easy stuff for the for the Investor day. Thanks again, thank you.
Your next question comes from Andrew Obin of Bank of America.
Hi, good morning.
Hey, Andrew.
Just a question, it's sort of been asking different format, but.
How do you think of the businesses that are doing well how much will be sustainable in 2021, but just trying to see if things normalize or do you think businesses mean revert I think they've been doing well and growing cobot sort of get a little bit weaker.
One thing that you know, where we get stronger or do you see structural changes and longer term growth rates within your portfolio post crovitz.
[laughter].
Oh, let's see here I look the only business that we have that.
Tangibly benefiting from covert today would be bio pharma.
But that is a business I think we sized it up for you I mean look it's great. It's growing fantastically the margins are terrific, but its not okay.
Overly materially weighted in the portfolio and that's the one that's benefiting I mean, all this you know belvac is going to benefit but we.
But we believe that that is more structural than covert related just because of this issue of recyclability and and moving away from P.T. So you know we don't think that we.
We don't think that we have a coven tailwinds embedded anywhere in our business. So it's purely a question of the ones that are suffering to portions of the portfolio suffering which ones are coming back.
I think it's fair to say that the one that we're taking a close look like is is that our compression business.
Which is the one that is levered most to midstream and downstream.
Whether that.
Demand in terms of Capex maintenance remains subdued in 21 or not but.
But again that is not overly.
Significant to the portfolio, we can weather the storm so.
Our expectation is the parts of the portfolio that are doing reasonably well, we'll continue to do so.
And the ones that have been under more pressure will come back on different trajectory is based on their end markets.
Okay and then just follow up question on our progress has been been asked her.
Got a disconnect that oh on a textile printing on the printing and I'd textile printing Capex you highlighted it or you know digital printing sort of weakness given the strength in consumer spending just a little bit surprised that this business would be a weaker can you just provide more detail afterwards.
Nothing there.
Yeah, I wouldn't I wouldn't consider to be weak I mean revenues were.
Were flat and margin was at margin was up I mean, the yeah. The consumable business is tracking right with.
Consumer goods, which is great I mean, the printer business in the service business is still a bit choppy because that still requires access rights.
Hi, customer locations and everything else so its pretty straight forward.
Your next question comes from Joe Ritchie of Goldman Sachs.
Hi, Thanks, Good morning, guys Joe.
Hey, rich how do we how do we think about that the backlog conversion and in refrigeration and food equipment and the reason I asked the question is if you go back to like that you know a few years ago. You know I don't know 2015 2018 is pretty is pretty one for one type relationship between your orders and your revenue.
And so clearly you know in 19 and 20 orders there are much better than than what your revenue run rate and I know part of that is the automation project like how do I think about like the length of the backlog and how that converts over the next couple of years yeah.
[noise] may think about this.
We are.
Like we give segmental backlogs and I think that we size the portion that now in fact, it's in there, which distorts that backlog because somewhat.
You know the refrigeration business in particular is relatively short cycle. So to the extent that were getting orders for 2021 is actually early now while it would have been early let's call. It a month ago.
Which is a good sign because it's generally speaking.
Food retailers don't kind of secure capacity. They just believed that the market's been over Capacitized forever. So they just placed the orders on your run through hoops to deliver it to them. So they I think the good news is based on what our customers are saying about their own capex and maintenance programs.
That we expected to be up in 21.
And the other good data point is is that we're getting orders for 21, now which is technically earlier a little bit early so that's the good news, but I wouldn't try to.
Disaggregate, our segmental backlog because you've got belvac in there and it's it's it's not very material.
Got it okay that makes.
That makes sense and then I guess, maybe just the just kind of the one follow on question would be just around like capital deployment I know that you guys. You know reinstituted the buyback last quarter. It didn't seem like you guys did much this quarter.
How are you guys thinking about that versus.
I know you mentioned, yes, you to two to 500 million dollar type deals like where are you kind of like prioritizing your investments.
We're still prioritizing on the inorganic or we had to walk away from one in the quarter because of.
For a particular issues that would have been an outlay in excess of 300 million. So [laughter].
As change plans, a little bit lock at the end of the day, where it's a wait and see we've got a decent pipeline, we'd like to convert that free cash and inorganic investment, but we're not just going to do deals to deploy the capital right. They have to be smart and they have to be within the parameters that weve laid out.
And if not then we'll revisit capital return and I'm sure that will be a discussion we have the board meeting next week.
Okay. Thanks, guys.
Our next question comes from the line of Josh Pokrzywinski of Morgan Stanley.
Hey, good morning, guys.
Hi, Josh.
So we've covered a lot of ground already but rich I want to come back to another comment earlier on the backlog in kind of the visibility into the first quarter first half relative to normal how would you size that I mean, clearly you know I think you're trying to focus people on the comfort with 2021 over Fourq you I talk.
So we get that anyway to put some some guidelines around proportional visibility this time of year versus what you would normally have.
[noise].
I think that we talked about refrigeration that lengths.
And we've talked about Belvac that we've seen there.
On our longer cycle businesses maag.
It comes to mind DPC to a certain extent.
We would expect to deplete backlog in the second half of the year as your bigger projects roll off and then you build it up.
We shipped heavily offer that backlog in MOG and it's not as if for falling into a hole. So I think the good news about mogg is is that despite heavy shipments in Q3 that backlog is not depleting at a high rate, which has that been that's all 21, just because of the delivery.
Times, and those particular businesses.
The balance of the portfolio outside of digital printing is generally speaking short cycle.
I mentioned vehicle service group, who had an excellent quarter in terms of shipments and operational performance they've got a little bit of a bad comp in Q4, just because they are running some promotional things last year prior to price increases.
But what we're seeing in terms of dealer communication there is very good for 21.
So.
I think it's it's anecdotal I saw there is no real general comment for our portfolio. This wide, but and you know I think that where the signaling you were getting for 2021 overall.
Is policy.
Prospective.
Got it so it's not just the phenomenon, where a fourq used a little weaker in January is awesome, but we don't know anything else about 21.
You know as I mentioned before I mean, you think about like a businesslike SG right. If they've got backlog for 20 for 21 deliveries, we can make the product in Q4, I read that which and which positive absorption negative working capital I've got confidence in that business to build that product in 2021 and meet the delivery date. So.
To us as we've always done around here Q4 is about the cash generation and setting ourselves up for 21.
Got it and then I noticed another automation projects announced in precision components.
Any more I guess kind of.
Spread of automation or you know kind of analyzing some of the technology out there across the portfolio that we are that we should expect beyond Brazil components, and I guess refrigeration is that something that could be kind of the next wave of cost reduction.
Yeah.
Is there a few of our businesses that lend themselves.
Two increased automation.
As we mentioned during the pumps and process solution virtual investor day that that our expectation is to get on a a cadence of doing more of those rather than the [laughter].
[laughter] tour de force on the portfolio.
So one of the things that we're discussing is we have.
Two were two big projects, one of which was completed in vehicle services group and one that is is under construction around that that we would expect.
Is a candidate to do some more investor outreach in Q1 of 21.
Great. Thanks, I'll leave that.
Our final question today will come from the line of Nigel Coe of Wolfe Research.
Yes, excuse me in this.
There's a there's not a whole lot to with them onto here, but.
Just go back to build back you know, it's the cost trends, we're seeing in and can manage.
Manufacturing.
It's upside to that that we face some structural headwinds in chemicals plastic polymers.
Going forward. So therefore, some of the some of the weakness we see in backlog build as is more structural than spend just go.
You know Nigel I'm sure when I talk about Belvac, the guys at Belvac listen and chuckled at themselves how little I know about can making so [laughter] for me to ahead of me to bridge that over into the chemical World on P. 80, I think you're going to have to ask somebody else.
Based on what we hear from our customers both the can makers on the machinery and from the bottlers in terms of the design.
Portion of the can making.
We believe that its there is a structural change underway how that impacts.
P.T. demands I leave it up to the chemical producers to answer that.
All right. That's a good answer and then just quickly on the heat exchanges.
I think you said, it's both commercial and industrial markets.
A couple of times, you've seen an uptick in and he's changes with Citi seeing that strength in the end markets.
More on the heat pump side than anything else, that's where our particular strength is and that is where we are in the midst of completing some material capacity expansions.
If you know anything about that market.
The size of these oh.
Of these heat exchangers is getting very large because these are pretty huge systems that are being installed specially on the back of European legislation. So that's really where the demand function for us is coming from.
Okay. Thanks much thanks.
Thank you that concludes our question and answer period, and Kemper's third quarter 2020 earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.