Q4 2020 Dover Corp Earnings Call
Good morning, and welcome to Dover's fourth quarter and fiscal year, ending 2020 earnings conference call.
Speakers today are Richard J tube, and President and Chief Executive Officer.
Brad Sarahpac senior Vice President and Chief Financial Officer.
And on Jacob 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 and then the number one on your telephone keypad. If you would like to withdraw your question 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. Please go ahead Sir.
Thank you Nicole good morning, everyone and thank you for joining our call. This call will be available for playback through February 18th and the audio portion of this call will be archived on our website for three months.
Dover provides non-GAAP information and reconciliations between GAAP and adjusted measures are included in our Investor supplement and presentation materials, which are available on our website.
We want to remind everyone that our comments today may contain forward looking statements that are subject to uncertainties and risks, including the impact of COVID-19 on the global economy and of our customers suppliers and employees operations business liquidity and cash flow.
We caution everyone to be guided and their analysis of Dover by referring to on our form 10-K and form 10-Q for the first for the quarter and for a list of factors that could cause our results to differ from those anticipated and any forward looking statement.
We undertake no obligation to publicly update or revise any forward looking statements, except as required by law and with that I will turn this call over to rich.
Thanks, Andrea and good morning, everyone, let's begin on slide three.
Order trends and remain positive across the majority of our portfolio since September and we had a strong finish for the year.
Our year over year backlog is up 21% as a result of general recovery trends across the portfolio a meaningful increase in the GFR each segment backlog.
And some recognition from our customers that raw material cost and supply chain constraints are becoming more challenging into 'twenty and 'twenty one.
Driving preorders in some markets.
Revenue of $1 8 billion was flat versus the comparable period adjusted segment operating margin at $17. One per cent was flat despite unfavorable revenue mix during the quarter for.
And the full year revenue was down 6% and adjusted segment margin up to 16, 7% as a result of structural cost savings.
Center led strategic initiatives tight cost controls offsetting the impact of fixed cost under absorption.
As we discussed at length and Q3, we are driving towards the strong cash flow performance and the fourth quarter and we got it with full year free cash flow, increasing 24% over 2019, achieving 14% of revenue.
This is what we would expect to happen as we liquidate working capital in excess of loss profit impact and as a result of efficiency gains from our back office consolidation program.
And that backdrop, we look into 'twenty and 'twenty, one with conservative optimism, our order book of solid, albeit with a different mixes of compared to last year.
With D F Ari.
Having a material positive impact of the top and bottom line and 21, we are executing on many initiatives other than structural cost take out that are expected to deliver and margin improvements, which I'll cover later in the presentation with that we are initiating full year guidance of 5% to 6% organic revenue growth and adjusted EPS.
Of $6 and 25 to $6 and 45.
And that spend a lot of Tom on slide four which is a more detailed overview of our results of of course quarter. So let's move to slide five.
Engineered products revenue declined on lower shipments and Capex levered markets, such as industrial Winches waste handling equipment and vehicles and services services ESG and a tough Q.
Q4 comparable to overcome and V. S. G was coming off of strong Q3. So the performance was largely expected both have strong backlogs into 'twenty 'twenty, one and the aerospace.
And defense business had a strong quarter that and at a record year for the business and demand and industrial automation has shown robust recovery contributing to our backlog as global auto sequentially ramps production.
And fueling solutions as we discussed at the end of Q3 of the comparable benchmark for Q4 was tough despite the topline pressure the segment posted another quarter of strong margin performance on lower volume as our as our productivity actions remain durable we are beginning to see the mix benefits from our helix and anthem dispenser.
<unk>, which we believe are winning in the marketplace.
We completed the acquisition of innovation control systems, and the fourth quarter, which is of Great addition to our vehicle wash platform Ics as a leading supplier of access payments and site management solutions and software, which fits into our strategy of driving long term value from the large installed base of retail fuel sites, which we.
And in October.
Sales and imaging and identification declined 3% organically the core marking and coding business grew on continued healthy demand for consumables and improvement and demand for printing equipment.
With particular, particularly healthy activity and the United States.
Digital textile printing capex remains slow.
But it would begin seeing recovery and demand for consumables.
And small format machines.
Which are likely harbingers of conditions normalizing in 2021.
Imaging and identification is our highest gross margin segment, the marking and coding business has delivered commendable margin performance. This year holding the profit line virtually unchanged, however of Decrementals and textile printing on lower volumes weighed on the segment margins in Q4 and during the full year. We expect this to begin reversing progressively into <unk>.
And in 'twenty one.
Pumps as pumps and process solutions returned to top line growth and the fourth quarter on strong growth and Biopharma and medical and hygienic applications. We also began seeing cyclical recovery and industrial pumps, which posted growth after several soft quarters and compression.
And components and aftermarket continued to be slow, but recent trends and natural gas and LNG markets gives us grounds for optimism going forward.
The fourth quarter closed off of solid margin performance and this segment with margins expanding 150 basis points, and Q4 and 220 basis points for the full year. This was driven by broad based productivity efforts efforts cost controls and favorable mix and well timed capacity expansion and biopharma and medical which we highlighted.
Earlier in the year.
Refrigeration and food equipment posted 13% organic growth with all businesses, except food service equipment delivery and the increase a significant significant portion of the growth came from the well advertise strength and can making we're also very encouraged by activity and core food retail market, which grew organic.
Topline at high single digits in the quarter driven by the continued strength in the door case product line, where we saw double digit growth for the full year of.
Heat exchanger business grew on robust demand and heat pumps and residential applications as well as refrigerated transport and industrial applications like semiconductors and data centers.
Margin performance expectedly improves and pointed by volume and actions, we took and the middle of 2020.
Absolute earnings increased 71% and the quarter of the comparable period.
This margin performance, coupled with the upcoming ramp up of automated case line and food retail was it positions us to deliver material margin expansion in 'twenty and 'twenty one.
I'll pass it to Brad here.
Rich good morning, everyone.
Let's go to slide six.
On the top is the revenue bridge, our topline continued its recovery with sequential improvement and organic revenue over Q3.
Several of several of our businesses, including short cycle industrial pumps and heat exchangers returned to positive growth in the quarter.
While biopharma aerospace and defense market and coding food retail and Kim making continued their positive growth trajectory from prior quarters.
FX benefited the top line by 2% or $34 million driven principally by a strengthening of the euro against the dollar.
Acquisitions more than offset dispositions and the quarter by $12 million. We expect this number to grow in subsequent quarters.
The revenue breakdown by geography reflects sequential improvement in each major geography, except with the exception of Asia.
The U S. Our largest market posted a 1% organic decline and the quarter and improvement over the 4% decline in Q3 and progressed.
Progressively improving order rates and a strong quarter and biopharma marketing coating food retail and Cam, making among others.
Europe declined 3% organically driven by retail fueling and a difficult comparable quarter and vehicle services, though partially offset by continued strength and several of our pumps and process solutions businesses.
All of Asia was down 11% organically, driven principally by China, which was down 16% organically.
This result, and China was not unexpected as we continued to face headwinds and retail fueling due to the expiration of the underground equipment replacement and mandate.
Moving to the bottom of the page bookings were up 2% organically, reflecting the continued momentum we see across our businesses in the quarter, we saw organic growth and four out of our five segments.
With segment fueled solutions faced a difficult comparable quarter and the prior year as previously discussed.
Overall, our backlog is currently up approximately 300 million of 21% higher compared to this time last year positioning us well as we enter 2021.
Let's go to the earnings bridges on slide seven.
We delivered improved sequential results in the quarter after a significant decline in Q2 and a recovery in Q3.
On the top chart adjusted segment EBIT.
And margin were both essentially flat year over year as well as continued productivity initiatives offset negative organic growth and dilutive impact of FX on margin.
Going to the bottom chart adjusted net earnings declined $1 million as higher taxes, and corporate expense offset improved segment EBIT.
The effective tax rate, excluding discrete tax benefits was approximately 21 four per cent for the year compared to 21, five and the prior year.
Discrete tax benefits were 8 million and the quarter and $22 million for the year were approximately $4 million lower than in 'twenty and then in 2019.
As we move into 'twenty and 'twenty, one and excluding the impact of discrete taxes, we expect the effective tax rate to remain essentially the same as 2020.
At about 21 five per cent.
Right sizing and other costs were 21 million and in the quarter of 17 billion of after tax relating to several new permanent cost containment initiatives and other items that we executed at the end of 2020.
Now on slide eight.
We are pleased with the cash performance in 'twenty and 'twenty.
And with full year free cash flow of 939 million of.
$181 million or 24% increase over last year.
Free cash flow conversion stands at 21% of revenue for the fourth quarter, historically, our highest cash flow quarter and 14% for the full year, a significant increase over the prior year.
Recall on last quarters or last quarter's earnings call, we decided to prioritize prudent working capital management over fixed cost fixed cost absorption to close out the year and you can see the value delivered and our year over year working capital comparison.
We have strong revenue visibility into Q1 and confidence and our team's ability to match industrial production.
With improved customer demand.
With that I'll turn it back to rich okay. Thanks, Brad I'm on page nine.
Let me take a few moments to give you an update on our center led initiatives that we outlined on our strategic plan in September of 2019.
While we could have not expected what transpired in 'twenty and 'twenty, we positive at the time that our portfolio had through cycle durability.
And that there were opportunities to drive synergies from our diverse portfolio to improve profitability over time.
Despite this we often hear of notion that Dover is of cost out story.
Likely because we get and measurable structural cost saving goals each year, implying a finite nature to such and Denver.
There's a lot more to than cost reductions to our improvement journey and we continue to reinvest a portion of the savings. So we'll give you a short update on where we are and the strategic initiatives true.
And 2019, we began with of right sizing of our SG&A base after a significant ports portfolio.
No change this was necessary and required immediate intervention.
Since then and the improvements have been driven by steady productivity and structural cost actions by our operating units.
And from our investments and four core enterprise capabilities that generate very attractive return on investment and can be leveraged across the portfolio.
The investments of substantial by the end of this coming year. The head count involved of center led enterprise capabilities will have increased by over 50%.
And he's our transformation transformational initiatives touching every corner of our global portfolio and delivering real results that you can see on our bottom line.
And there is significant runway to drive value and we are investing and the following four enterprise capabilities and I'll highlight a few results, but I would encourage you to review the stats in the slides.
First don't Dover digital on Slide 10, and this work began in 2017 and accelerate in 2018 with the opening of our Dover Digital Center and Boston, We have over 100 E commerce connected product and software and experts dedicated to this index.
This team helps our businesses lever each commerce at scale and improve the customer journey with ease of doing business as well as backup back and efficiency for sales and order entry.
For example, this year, we target to reach a run rate of $1 billion of revenue processed through digital channels much of which is service parts and catalog items compared to $100 million of 2019. This.
And this team also helps our business connector products and enhance their offerings, which we will aggressively highlight and future presentations as we did for fueling solutions recently.
This is a multiyear journey value creation journey and we are very excited about what lies ahead for our digital team.
Moving to slide 11, and our operations Center of Excellence is a central team of domain knowledge experts that delivers health and safety supply chain management lean operations and advanced manufacturing and automation and.
This team is instrumental in driving value through rooftop consolidation and automation projects. As you know we have a number of these and the works. We are also excited about the results of the early lean initiatives. This team of spearheading. This was another multiyear journey and we continue we will continue to deliver results.
Moving on to Slide 12 is our central back office system, which we call Dover business services.
We've been at this for several years and we're still in the early innings of expanding the scale and scope of this capability by centralizing and offshoring transactional back office facilities, we multiply efficiency through scale.
Technology leverage and unit cost arbitrage DBS is and will remain an integral part of our margin enhancement story and.
And lastly, moving to slide three the India Innovation Center is more than 600 person strong teams.
And that our operating companies can leverage for product engineering digital solutions development data and information management research and development and intellectual property services.
The scale and expertise of this team allows our operating companies to tap resources that would been on affordable to them as Standalone companies and allows for concurrent engineering on time time sensitive projects.
So let's sum this up on slide 14, we laid out four pillars of our strategy in 2019 and have been delivering through cycle. We have maintained our focus on margin improvement and continued to invest despite the economic difficulties of 2020.
Our end market exposures of coupled with the strategic R&D investments, we are delivering and attractive growth profile. We are committed to reinvesting in our businesses and that's top priority and capital allocation to maintain competitive competitiveness and fuel growth and improved productivity.
And we're making good strides on the inorganic front.
Finally, we are staying disciplined on our capital allocation by returning excess capital to our shareholders via growing dividends and share.
Repurchases moving to 15, where does this leave us going into 'twenty and 'twenty. One we believe that our playbook offers us a significant runway to continue delivering attractive through cycle returns.
Through mid single digit top line growth steady margin expansion healthy cash conversion and disciplined disciplined capital allocation and shareholder friendly capital return posture.
Okay.
I'll step off the soapbox and let's move on to 16, we expect demand and engineered products to rebound in 'twenty.
We have seen strong bookings recently and vehicle services and industrial automation with relevant automotive and vehicle usage statistics trending and the right direction book.
Bookings have also improved recently and waste handling and we are nearly fully booked for the first quarter.
Municipal demand will remain uncertain, but we see strong trends and the parts and digital business.
As we previewed in November and we expect fueling solutions to have a modest organic growth year.
There is known headwinds EMEA and V roll off and the U S. But there are a number of positive offset.
And are encouraged by the prospects of our new anthem user interface solution offering, we expect robust growth and our systems and software business.
And we'll be launching the industry's first cloud platform developed with Microsoft.
And you also see good setup for vehicle wash and are excited about having Ics and our portfolio.
We expect imaging and identifications.
And identification to perform well this year.
Marking and coding saw limited downside and 2020 and we've been on a good trajectory in recent quarters. Despite the tough comp in Q1 due to COVID-19 driven consumable stocking.
We expect further improvement and services as travel restrictions subside and activity and serialization and software is also of firming up.
The biggest factor and this segment is of course of that digital textile printing unit. Our initial read is for the recovery to take place and the second half of the year when printers will be ramping up production for 'twenty and 'twenty apparel collections.
Pumps and process solutions is expected to have another solid year, we expect robust growth and biopharma.
And hygienic applications and a continued recovery trend.
And industrial pumps.
Plastics and polymer is expected to deliver.
Steady performance with a comparable basis to the second half biased to the second half.
Precision components is likely experienced a slower start to the here and we're still.
Comping versus last year's first quarter with that saw robust upstream and downstream activity.
And finally, we expect a very strong year and refrigeration and food equipment. The core food retail business is operating with a strong backlog and the order trajectory has been healthy and the last few quarters, we expect retailers and a pause their remodel programs last year amidst the pandemic to restart these strategic initiatives.
And we are well positioned to participate and that activity and.
Additionally, we see a good outlook for natural refrigerant systems, both in Europe and also in the U S, where California was the first day to recently mandate transition to natural refrigerant and systems.
We were the pioneers in this space and we are very well positioned to capitalize on this sustainability trend and the industry.
<unk> as you know is working through our record backlog and is booked for the year. Our heat exchanger business also exited 'twenty and 'twenty was a record backlog and a constructive order trajectory across multiple verticals. This will result in material margin improvement and this segment on the back of the case of production automation project higher volumes.
Positive business mix.
You've covered most of the items on the early of slides, but summarize, but I summarize them here on the slide for your reference as usual for a wrap up I'd like to thank Don everyone of Dover for their work and continued perseverance. During this last year. The Dover team has delivered strong results and it's difficult conditions and I commend all of our employees.
And as we're doing their part and Andre with that let's move on to Q&A.
Nicolas.
And simply fresh start and the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key.
We ask that participants limit themselves to one question and one follow up one moment of fire first question.
The first question will come from the line of Jeff Sprague with vertical research.
Thank you and good day everyone.
And a lot of good additional information there.
But just let me dig into like a couple of things if I could Rick first interesting. What you said about the kind of pre ordering are you able to.
Fully protect yourself with price and hedging and other things.
You know on that type of activity that youre seeing from your customers.
Yeah, I'll, let Jeff I mean, I think we've got a couple of challenges go into Q1.
Raw material prices are moving up and there is a lot of constraint in logistics right now.
I think that it's.
And going on somewhat through the fourth quarter and.
And it looks to be getting tighter going into the first quarter as economic activity moves up.
Uh huh.
The bad news is we're going to have to deal with those constraints.
And we're gonna have to be on the front foot in terms of.
Offsetting raw mats in terms of whether it's either pricing and productivity.
But I think that my comment about the backlog it is influencing of demand and the backlog because I think that theres beginning of recognition out there.
I've got to get my orders and because of these constraints I mean, it's.
Look at what's going on and auto just.
As a precursor to that so I don't think it's bad in a way and I don't think it's negative for us in terms of.
People, placing orders in advance of raw material costs, because I think that we've got some levers to pull there and it's really short cycle at the end of the day.
The good news is I think to the extent that our backlogs go up from an S and O P process, we can plan more appropriately and that drives.
Efficiency at the factory level of floor, so probably going to be a little bit of and interest in Q1, but I think overall, it's not insurmountable.
Great and then just shifting to <unk>. So it looks like you.
You'll have the volumes here of the fully kind of exercise of the automation project.
Suppose you don't want to get into margins by segment here, but can you give us a little color on.
How the how the margins should play out and that business and is there any kind of other than the kind of the normal seasonal peak that we'll be looking at any other and just kind of and.
And ways of movement and the margin trajectory there no I would expect that the margins two to comp well every quarter, but the seasonality of those margins to remain intact.
Great. Thanks.
The next question comes from the line of Paul.
Hey, guys. Good morning, good morning.
Morning, Steve.
I think though it would be.
Lots of Buzzwords rich not use of you kind of like talk and at that high of a level about.
Corporate strategy, but.
I think the message is that there is something like a little bit more sustainable than just like a couple of years of cost cuts and.
Noticeable to me was the.
25% to 35% incremental margin guide.
And then the 11% to 13% of revenue and free cash flow and a year, where you'll be growing pretty strongly so basically.
You should see some headwind it shouldn't be like a great cash here for example, I think back in 2019, and the fall you said, 25% to 30% Incrementals and 8% to 12% free cash as a percentage of sales are these kind of like sustainable step ups that you would hope to deliver over time.
And as part of the earnings and cash algorithm, Yeah, I look at the end of the day, we expect to be pulling on both levers consistent margin expansion and cash flow productivity <unk> productivity and the working capital line.
Bottom line is as we've been saying all year, we would expect with the headwind that we'd be liquidating our balance sheet as we should in a difficult environment on the revenue side, we will have a working capital build because we've got a pretty robust.
Revenue forecast going into 'twenty, one, but do I think it's going to make our metrics worse.
Demonstrably, so because I think that we're going to get the benefit of the margin expansion and I don't expect it to deteriorate at all in terms of working capital as a percentage of sales.
And I and I would guess it but when I look at that 11% to 13% of revenues I mean, it's not like.
Of your Capex is actually above what I would expect it to be I mean is the $1 75 to 200.
Now of sustainable run rate or is that something that you push some projects out of 'twenty into 'twenty, one because I think of you guys were planning on that coming down a bit that there were some temporary projects what's.
What's the outlook for Capex for the next couple of years and we've got.
Two new transformational projects underway.
One in vehicle services group, and one and ESG.
Which look I mean at the end of the day, they're not they're not nearly the same scale of the new building that we did at CPC and.
And what we did at D. F R. But it's the same logic I mean, it's it's automating what were pre.
Pretty manual processes. So I think that we're going to get a relatively quick payback in terms of the margin expansion there.
It's early and the year I think that we've tended to always forecast of higher Capex number that's actually gets delivered.
And that number looks reasonable considering we've got two bigger projects, but and so I don't want of I don't want to take the number of down right now or say, it's an anomaly.
But experience would say that it's probably a little bit high.
Right, but I mean, if you do 11 and 13% of revenue even with that it's it's it's not that bad just one quick one.
You guys had talked about I think 25 million bucks of temporary cost reversals as a headwind into 'twenty one.
Can you just give us an update on that number if theres anything thats.
Coming back relative to what you did last year to protect the margins.
Theres nothing and look at the end of the day, we'll be building. We've got estimates of building it back some incentive comp and a variety of other things, but but look its all built into the EPS forecast that we have there whatever the pullback of of kind of.
Yes, let me split and let me answer it this way right. We had we had coverage on furloughs.
Okay. So that was a positive this year because of deferred the cost of us having to take to.
And to take those people out to a certain extent.
What we're going to bring back is going to be absorbed into industrial production and the revenue line. So net net that's that's in and different so what we're talking about is general SG&A.
And the bigger movements that were T and E and incentive comp. So let's think positive for a moment of incentive comp comes back I think.
T and he's going to come back, but is it going to reach 2019 levels no.
Right, Okay, great. Thanks, a lot. Thanks.
Our next question comes from the line of Andrew Kaplowitz of Citigroup.
Hey, good morning, guys good morning.
Hi.
Rich with the understanding that we don't want to get too far ahead of ourselves and our and F. T with the backlog that you have and the core food retail business picking up as well as the bill that the deliveries and ramping up would you actually say that the high single digit forecast for 'twenty one.
Could even be conservative given the double digit momentum you saw on Q4.
So the three and a little bit early and they said, we don't want to get ahead of ourselves.
Yeah, and let's get ahead of ourselves while we're not get ahead of ourselves look I you know what.
I think that the backlog is of good precursor for delivering the incremental margins that we're looking for from a segment point of view our expectation it's the highest.
Growth segment, and our forecast right now and.
And I'd have to go back to look because there's a margin differential but it's a material contributor to the EPS expansion so to the extent that trend continues.
Because this is a relatively short cycle business, if I, just talking about refrigeration now and not Balzac and <unk> booked for the year. So we get more orders for <unk> that just gets pushed into 'twenty and 'twenty two quite frankly, so D. F R, which is generally of short cycle business.
You know, we're covered for Q1 and beginning to get it to coverage into Q2, let's get Q1 under our belt before we start moving the number of up but it's a lot of the total profit change.
That we have baked into the EPS is coming from that segment and by the way and the reason one you could say well it's.
Not overly aggressive in terms of the conversion range remember that's one of our lower margin businesses. So that's kind of bring down the consolidated conversion of little bit, but we'll take it in terms of absolute profits.
Very helpful. And then rich just and engineered products, maybe just give us a little more color into what happened and this quarter and Q4 I know you said it was just basically you know expected sales decline did you see any inflationary pressure in that segment.
Segment, and the quarter and how you're thinking about the margin in that segment and 21.
Not inflation I mean, I think that if you go back and Q3.
The guys did a fantastic job and V. S. G of delivery of our backlog that had built during the quarter sort of production performance. There was very very good.
And it actually aid into Q4 from a comparable point of view.
So that's not a problem there and ESG I mean, the weak part of the market, which we've been talking about all year is municipal and generally speaking municipal tends to get delivered at the end of the year. So we knew that they had a bad comp.
Having said that look at the end of the day those are easy.
That segment is more of our industrial businesses, So that's where the raw mat.
Headwinds are and look we're going to have to work that out between volume price and productivity, but I think.
We fully expect portfolio wide to offset all raw material headwinds.
Thanks, Rich I appreciate it thanks.
The next question will come from the line of John and with Gordon Haskett.
Thank you good morning, everyone, good morning, rich and Brad and Andre.
If the economy were to rich really pick up starting today and the second half as let's assume the vaccine rollout is successful are you geared to handle what could be of material upsurge in demand or would you have to like.
And get to kind of come up with a plan to sort of debottleneck or expand capacity or bringing a bunch of people back like how how would that how would that work.
The only area that we've got.
Real capacity constraint would be and a niche business like belichick.
The balance of the portfolio does not run on even five day, three shift operation and quite frankly for the most part.
Six day of week single shift group here, so to the extent that we have some amount of visibility.
And to the extent that as economic activity ramps that the supply chain keeps up with it which it isn't right now.
And I don't think that we were capacity constrained in any meaningful way of.
Having said that I mean in terms of top line growth.
Tom.
I think that we're expecting and can.
Economic activity to kind of sequentially ramp through 'twenty one.
And our forecast, but are we capacity constrained outside of some of our niche of your business is no.
No. That's fair you just mentioned supply chain by the way are you at a point, where you're trying to circumvent this or are you letting it ride to see how it happens, meaning I don't know, possibly seek other suppliers dual sourcing and that sort of thing or is it still sort of too early to tell no no no no no no we're doing everything under our power.
To get beyond this because whether that is buying raw materials forward.
Because into the increasing.
Curve on.
On plate steel of sheet metal of something like that which we're doing.
We've given guidance to all of our operating companies.
That from a working capital perspective, if they need to build at the beginning of the year and bleed it off and the second half of the year, we take the production performance and the efficiency of that rather than getting into stop start.
Kind of scenario and then there are certain of.
A lot of the pinch points forget kind of logistics with container freight and everything else some of the pinch points on and electronic components and we're fighting it out with everybody else.
Mhm.
Okay, no that makes sense.
Maybe just lastly here on.
I'm actually really intrigued by the attention and you put toward India business services, and so forth and deservedly. So.
And if Dover, where a substantially larger company with efficiencies and the initiatives like the Dover business services exponentially compound.
I mean youre on a huge company right. So if you were all of a sudden and to do M&A and become a lot larger.
And sort of those benefits accrue at a compounded basis of prospectively it of linear basis, it's almost like and these things that you are creating serve to create four mechanisms to justify why Dover should actually continue to expand into adjacencies to create shareholder value.
And a reason that we're doing it is as we've said all along and that.
Dover is reason to exist is to bring services at scale that are kind of our smaller companies would not be able to do on their own.
Having said that as we build.
As we build those services.
We're not even beginning to scratch the surface of the leverage that we get because the fact of the matter is despite the robust trend and growth that we have we are continuing to reinvest at a certain point you've built enough scale that bringing on another 100000 transactions doesn't require you to build out anything more.
And you flip over in terms of the benefit of.
Of that leverage.
Having said that we have a variety of conversations around here about being of compounds, there and doing something on the inorganic side. This is clearly an asset for us due to extract synergy value of anything that we were to buy.
Makes sense, thanks, rich I appreciate it.
And next question will come from the line of Scott Davis of military.
Great. Good morning, guys Scott Scott.
Richard can you give us a little bit more color on retail fueling and China and just.
Are we still decelerating and we kind of.
A new normal.
Demand level.
And then.
And we're getting feedback.
Can you hear me.
On the new okay.
Okay, Alright that works thanks Andre.
I think as of last.
Bad comp for us.
Which was on that double wall issue, but having said that the volume.
And that we see out of primarily the Nox and China has been pretty low.
And we don't we had a big conversation around here of the other day, whether that's because of.
Is the volume down and we're missing out on it or is the volume just down we've gone out to all of our traditional customers in China, we still rate very well in terms of their purchasing programs I just think that for.
And for whatever reason that 'twenty and 'twenty was a down cycle in terms of kind of of the big the knock buildout of their of their retail operations.
Early to say, whether that recovers and that's not really built into our forecast for 'twenty, one but at some point, it's going to have to.
Okay Fair enough and then just.
As a follow up I mean, you talked a little bit of inventories but.
It's hard to say just given the diversity of your businesses of course, but our inventories back to normal you would say at the customer level.
We've heard below trend line of inventories for.
Several quarters now so I went back to normal.
Some of them double ordering.
Unfortunately.
It's one of these it depends Scott answers we have.
Businesses like our industrial pumps business that sells through stocking distributors or early reads.
Here in January is theirs and amount of restocking going on because of our backlogs and the industrial businesses. There are building the same thing with material handling those.
Are those backlogs are building so.
I think it's fair to say that everybody was very prudent in terms of inventories on the distribution side in 'twenty.
And now everybody is trying to make two calls.
What is economic activity going to be in 'twenty, one and the second thing I issue I mentioned of if theyre going to be supply constraints as everybody ramps sequentially do I gotta get on the front foot and get my orders in because there is a potential that some of those deliveries are going to be delayed outside of the quarter. So.
And Theres really two of those phenomenons going on and do I think.
That they are severely under stocked no, but I think that by and large are stocking distributors are going to stock based on what they think that the revenue is going to be and and then which is built into our forecast.
Okay. Good luck guys. Thank you.
<unk>.
And next question will come from the line of Julian Mitchell of Barclays.
Hi, good morning.
And maybe.
And my first question around any margin kind of by segment that you can give.
The 25 to 30 sides Guy.
Tom White of incremental margins.
And he segments to cull out of being at the extreme ends of that spectrum, and maybe just to find of pulling and D.
Yes.
Should we expect operating margins to grow this year or that might be a challenge because of the E. M V mix headwinds.
Huh.
There is plurality in terms of incremental margin with the exception of engineered products.
Which would be slightly lower and so let's discuss why right.
The engineered products is going to be slightly lower just because of the gross margin within that within that segment and despite the fact of D. D. RFE has lower gross margins at the segment to level.
The revenue growth there is so high that youre getting a pretty big impact in terms of of.
Absorption benefit year over year so.
Now having said that we do have structural cost savings that are rolling through at the same time.
And that depends segment by segment, but I think that my comments here are I think you've got your finger on it for DFS, because relatively low growth environment and it is a little bit negative because of the mix, but we think that we can make that up in terms of productivity. So then the hierarchy would be.
Engineered products and the lowest and then plurality again across the rest of the portfolio.
Great. Thank you.
And then.
The full year guide.
Across the firm just wanted to perhaps the first quarter.
Maybe just talk about.
Orders and bookings and.
In recent weeks and should we expect the first quarter to look maybe a little better than Q4 in terms of year on year revenue and margin, but not substantially different until Q2.
I think the answer is yes, but that is of calculation and then I have not done around here I can just tell you that when you would expect.
Is the toughest comp is Q1 to Q1, just because it's pre pandemic to entering into 'twenty one.
But we expect it to be better vis vis Q1 <unk>.
Clearly Q2 comp is going to be of relatively low BARDA hurdle and then the back end of the year is going to be as well.
And we mentioned during the color on the segments that we have certain businesses that we believe are back end loaded.
Either because of seasonality or based on where they are and the recovery of those markets. So we expect to be better and Q1.
Everybody is going to be better and Q2, and then regular seasonality from there.
Uh huh.
Great. Thank you. Thanks.
The next question will come from the line of Bank of America.
Yes, good morning, Rich Brad Andre Good morning, good morning.
Just a question.
And I sort of starting to fire on all cylinders. When it comes to operational storage is starting to deliver consistently on the operational algorithm, but can we just talk about how is your strategy on capital allocation and specifically M&A is evolving going forward and what kind of opportunities.
Sure, we'd be thinking for 'twenty and 'twenty, one and what's out there in terms of availability.
I think that the hierarchy we've been over.
A variety of different times, so that's unchanged.
I think in terms of opportunity.
Theres plenty out there and a lot of it is very expensive for all of the reasons that we've that we've talked about.
And we're on the front foot.
Actually spent more if you go I don't know what the slide number was we spent more in 'twenty versus <unk> 19, and that's exactly right right. Yeah, we tried to spend a lot more than that.
Quite frankly.
But couldnt get it done because of valuation or a variety of different things. So.
Look I'm very confident and.
As you and as you described it the operational algorithm here.
I think that this is just a roll forward of what we've done for the last couple of years, so our confidence.
All of of <unk>.
Converting revenue into incremental margin is quite high.
I think that we have a lot of businesses that have earned the right to grow Inorganically, we just got to find the targets and execute on them without getting crazy.
Got you and just a follow up I think John has asked you about the supply chain, but how has your thinking about the supply chain has evolved throughout the COVID-19 sort of.
And then we can manage that very well, but anything different that you guys are going to do going forward and tons of where you're sourcing and I know, it's sort of extension of Johns question, but maybe more color.
I mean, we're notch.
Our supply chains are relatively discrete so any moves that we make are.
Auto OEM that have to make big strategic decisions based on <unk>.
Oh politics, and foreign currency and things like that so we're changing it all the time.
Two of certain extent.
I think that the the trade of buying low value high commodity price exposure.
Basic metal working out of Asia, and bringing back to the U S and I think that that has been dying for a couple of years now it's Paul.
Part and parcel of the reason that we're making some investments into V. S. G and ESG right now because we think that we can be more competitive and get the industrial absorption of doing it ourselves to a certain extent, but we're not we're.
And we're not making big strategic decisions and not banking big swings, but we're always trying to adapt.
The supply chain.
Thank you very much.
Okay.
The next question comes from the line of Joe Ritchie with Goldman Sachs.
Thanks, Good morning, guys.
Good morning.
Can you maybe following on that last question and your comments around being front and put it on M&A maybe.
Maybe just the flip side of that argument.
Is it like given where valuation levels are right now you could argue maybe there hasn't been a better time to look at your portfolio closer.
In terms of and.
Maybe on locking value on assets that.
You don't expect to be part of the portfolio of longer term. So maybe just some thoughts on that and how youre thinking about that specifically for 'twenty and 'twenty one.
Joe It's not it's not changed I mean, we're constantly revisiting a variety of pieces of the portfolio.
I mean, that's really all I can say about it at the end of the day right and we may have view.
Views on individual pieces.
While we don't want that to get and the way of us extracting the maximum.
And now you that we can out of the pieces that we have so.
We spent a lot of time here in terms of portfolio of construction.
On both and more on the and then the out but but we screen all of our businesses for their participation strategy and changes in the marketplace and everything else not so much a wait and but everybody is paying a lot for things. So maybe we should go to market. We look at it more as in terms of its hierarchy in terms of.
Return on invested capital and the group.
And whether they are advantaged or disadvantaged structurally over the next time horizon.
Yes, let me set that up.
Makes sense and then.
And that'll mean this to be a perfect segue, but I did want to talk about food retail to some degree.
You talked last quarter about the fact that margins had gotten back to the low teens.
Yeah, remodeling and restarted and I guess, how do we think the comments around like backlog and weather.
Net backlog is building because it's been essentially more difficult to continue on the remodeling at this point given the coronavirus cases, and searching just wanted to get a better understanding for.
And whether you're getting on premise access and then secondly, how.
And how the margins have kind of even trended even even beyond that the third quarter for the food retail business and specifically yeah.
And we're expecting big things from the retail food business. This year for sure a lot of the deferments that happened because of Covid access and a variety of other forces are clearly what's building the backlog into 'twenty, one, but having said that we've gone through $4.
And have close to five year cycle.
Where there hasnt been even we would argue replacement or maintenance spending in terms of global food retail. So there is some pent up demand there.
We think that we have a more competitive product now and we're changing the cost structure of that product.
And as we talked about before our view is that what the customers really value and this business is being able to have the product available when they want it and to the extent that now we've change our changing the dynamic of of our lead times.
I think that's beginning to be reflected in our backlog so.
This is spent and.
Management team of this business and spent two and a half years working real hard.
And transform this business and and our expectations in terms of profitability. This year is material in terms of what's baked into our EPS.
Oh, yeah, congrats on that will be nice to see.
Thanks.
The next question will come from the line of Nigel Coe with Wolfe Research.
Thanks, Good morning, everyone.
And we kind of on the ground already so.
And I really wanted to talk about the sort of a framework by 'twenty one of your data.
What struck me was your your your revenue growth range of five to six is quite tight.
And imply.
And maybe some conservatism.
And that's sort of a five part question and then the second half of your range for margin 25 75.
One of them, we normally see so we normally see bit more precision on Martin.
Revenues and nearby and so I Wonder if you could maybe comment on that and.
And the width of the of the margin range is that of function of portfolio mix, primarily on just some uncertainty around raw materials any kind of that'd be helpful.
Yes, Nigel I mean look I would expect that we're going to tighten both of those ranges progressively as we go through the year, but I mean, you've got your finger on it I mean.
We're.
Predicting.
And even even if we go to the organic revenue, which doesn't have FX. The margin does have FX and it's and we're predicting FX in advance of 12 months and we're predicting mix over a wide.
Diverse portfolio and in terms of gross margin.
So we need to give ourselves a little bit of latitude there as I mentioned and a previous question before the good news is that refrigeration coming back and in terms of absolute profit, it's going to be material to the bottom line. That's not really great in terms of consolidated conversion margin just because of the.
And of the EBIT margin of that particular business. So if.
If we go back to the question I think that was just asked before what could that revenue would be higher or are we and an inflection point, because there's really going to be and we're under forecasting refrigeration for the year and and a way I hope we are.
What that's going to do is push up the top line, but it's going to draw down the conversion margin, but it will take the absolute profit so.
It's our best guess right now I guess at the beginning of the year, we like to give us some latitude I think that the history around here has been.
To try to hit the top and we've got every intention of trying to do so.
Thanks Rich.
And then my follow on is really the comment around the <unk>.
Pre buy and prep preordering because of supply chain constraints, which makes total sense and we were sitting here and but the supply chain constraints.
But are you get and the feedback from customers.
And think telling you that this is happening and therefore should we expect that it would be maybe a moderation and order rates and <unk> sort of.
As a consequence of that full key dynamic is my gut feeling we have a president operating company presidents meeting as soon as we finish up with your question and that's one of the things that we're digging into but based on what we're seeing.
And our own operations and the guidance that we're giving our own operations of if youre seeing constraints out there you better get on the front foot and start buying components to the detriment of working capital, which we know we can bleed off of the balance of the year, let's not miss out on deliveries and production performance. So if we're doing it.
And my expectation is that everybody is doing it.
And gets to the detriment of.
Of order rates through the balance of the year no I don't because I think for what's baked and you look theres always going to be volatility quarter by quarter, but what's baked into our revenue forecast is shipments per.
A lack of better word if theres some amount of it and look at the end of the day you get a backlog that is in excess of your corp, first quarter production and probably not going to get it out anyway. So the good news I think when I answered Sprague before us.
The longer the bigger of the backlog that we have the more efficiently we should be able to run our factories and that's margin accretive.
Alright, Thanks, guys very helpful. Thanks.
Last question will come from the line of tools right.
And capital market.
Thank you and good morning, everyone. Good morning, good morning.
Are you interested in hearing what the dynamics are around that natural refrigerant and rich that you called out.
Your equipment be used for that does have to be retrofit and how do you think this trend develops from here.
Well, we did a press release on it not too long ago. So you can see our view based on what the ruling for California was.
We are a leader in the systems business in Europe, and Europe is probably three to five years ahead of the United States.
So we have the technology.
It's now going to be a question of what the adoption rates and whether they are regulatory mandated or new individual retail operations want to as part of ESG go Green and begin adapting those solutions. So.
We feel really good about our position in terms of having the technology ready readily available.
Got it and then just a second question unrelated if the new administration as part of the stimulus program puts through some restrictions about by American American products.
Dover position, just broadly and if that restrictions comes through.
And.
I don't I don't think it would be materially beneficial generally speaking.
We make and ship and the jurisdiction that we operate and as an overall comment.
Could you be flexible in terms of your supply chain in terms of doing some sub assemblies and the U S to qualify but just the last time just went through that's what we saw companies yeah.
Yes, I think if we were.
A big vertically integrated operation.
Yes, I think that it would be more of a challenge we don't.
We don't bring in assembled product of any grand scale that breakup.
Break apart and containers and then put value added on them and I've been through this.
Previous life.
Yes, I look at the end of the day I don't I don't think its going to move the needle for us. The only thing that comes to mind is if we were a component part.
And somebody wants to source and the United States and I had been sourcing and been importing it is that an opportunity I guess sure I wouldn't have any idea of how to scale. It right now though.
That's fair. Thank you very much thanks.
Thank you that concludes our question and answer period and diverse fourth quarter and fiscal year ending 2020 earnings Conference call. You May now disconnect. Your lines at this time. Thank you.
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