Q1 2021 Dover Corp Earnings Call
Good morning, and welcome to Dover's first quarter 'twenty 'twenty One earnings conference call speaking today are Richard J, Tobin, President and Chief Executive Officer, Brad.
Sarahpac Senior Vice President and Chief Financial Officer, and Andre Galliot, Vice President of corporate development and Investor Relations after.
After the Speakers' remarks, there will be a question and answers period if.
And 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 press the pound key on your telephone keypad as a reminder, ladies and gentlemen. This conference call is being reported and your participation implies consent to our recording of this call. If you do not agree with these terms. Please disconnect at this time.
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I would now like to turn the call over to Mr. Andre Gallium. Please go ahead Sir.
Thank you Lori good morning, everyone and thank you for joining our call. This call will be available for playback through May force and the audio portion of this call will be archived and 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, and the global economy and of our customers suppliers and employees operations business liquidity and cash flow of caution everyone to be guided and their analysis of Dover by referring to all of our form 10-K and form 10-Q for the first quarter 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 with that I will turn this call over to rich.
Thank you Andre good morning, everyone.
And since we have a big group. This morning, So we're going to have a robust Q&A session.
So let's move to page three and the business challenge moving into Q1 was two fold for Dover first we exited 2020 with a healthy backlog of business, which we needed to operationally deliver against.
Second we had and work closely with our distributors and customers.
To seize opportunities and the marketplace. Despite of complex set of challenges with raw materials components and logistics and labor availability.
We are pleased with our first quarter performance on both counts, which is reflected in our robust robust revenue growth and the increase and our order backlog as we move into Q2.
Let's take a look at the metrics total revenue was up 13% and 9% organic to the comparable period clearly the quarter benefited from a good order backlog position and the willingness of the channels to receive product deliveries as market demand accelerated resulting and the highest volume quarter since 2014 and the largest first.
Order volume since 2012.
For the company. This performance is clear indication that our product portfolio is attractive and often underappreciated growth avenues and that the work that we've done on operational excellence is gaining traction.
Order rates outpaced revenue and the quarter.
Posting bookings of $2 $3 billion of 27% comparable organic increase the growth was broad based with all five segments contributing to the increase.
This resulted in the seasonally high backlog of $2 $2 billion and increase of 39%.
Since our earnings are issued among the first and the industrial sector I suppose it is part of it's it's on us to explain the drivers of growth and their impact on seasonality and full year demand.
And to try to be careful with my choice of terms and comments not to cast unwarranted and shade.
On a clearly positive market demand environment and there are several factors driving healthy customer activity, including pent up demand from last year as a result of low starting channel inventories and certain sectors.
As I also mentioned in my opening remarks. This was further influenced by tight supply chains and materials inflation positively contributing to seasonal demand and backlog build as our customers and channels position themselves and meet their forecasted net.
Importantly, before we get all wound up trying to quantify the impact of channel inventory stocking and inflationary pre buy and how it impacts quarterly demand, let's not lose sight of the fact that total marketplace demand is robust which is reflected in our backlog and which also leads us to revise our revenue growth guidance upwards.
For the full year, 10% to 12%.
So put succinctly, it's not pre buy if we don't remove it from the full year revenue estimates.
Still early and the ear and we will continue to produce to meet customer demand and watch our backlog and order patterns character of more color on the drivers of demand.
And our revenue performance, including contribution of market share gains as we progressed through the year for now we are focused on executing operationally and demanding conditions to win and the marketplace, but.
But we clearly believe that favorable demand conditions remained durable through the year.
Let's move to profitability.
Q1 was solid with consolidated adjusted segment margin of 19, 1% 320 basis points of higher versus the comparable quarter.
This was supported by strong volumes favorable mix of products delivered Paul.
Positive pricing and continued operational discipline and of fishy efficiency initiatives, which more than offset input cost headwinds.
Strong profitability and continued focus on working capital managed result, and a seasonally strong free cash flow, which was up $110 million compared to the compared to last year's first quarter, where in the comparable period.
With a solid Q1 of our Q1 under our belt, we look at the remainder of 2020 with constructive optimism.
Strong order trends and a record backlog portend, a robust topline outlook and we have confidence and our team's ability to navigate the supply chain challenges with that we are raising our guidance for the year to 10 for 10% to 12% all in revenue growth and adjusted EPS of $6 75 to $6 85.
And <unk> dollars per share a substantial step up compared to our prior guidance.
I will skip slide four of which provides a more detailed overview of overview of our results for the first quarter. So let's move to slide five.
Engineered products revenue was up 2% organically as demand conditions improved modestly and comparable peers.
Vehicle services entered the year with a strong order book and face solid demand across all geographies and product lines industrial automation grew on automotive recovery and channel restocking and aerospace and defense shipments for solid the business remains booked well into the second half of the year as expected waste hauling was down year over year.
Given our lower starting backlog entering Q1, which was further impacted by component availability issues that constrained shipments and the quarter.
We have forecasted this business to be levered towards H, two and order trends and backlog to reflect that.
Same dynamic for industrial Winches with.
With revenue down and the quarter.
But recovery and order rates, we expect of continued gradual recovery and this business over the year mortgage and performance in the quarter was flat year over year as volume leverage and pricing offset the negative fixed cost absorption and the capital goods portion of the portfolio.
And fueling solutions was up 3% organically and the quarter on the strength of North American retail fueling and as well as our software and systems business in New York.
And China remained subdued.
Order backlogs are up 13% and we expect our hanging hardware vehicle wash and compliance driven underground product offerings to contribute positively due to an increase of miles driven and construction seasonality as we make our way through the year.
The segment posted another quarter of strong margin performance on higher volumes productivity actions and mix, which was a continuation of the trajectory that we exited and 'twenty.
Sales and imaging and identification improved 4% organically the core marking and coding business grew well and strong printer and services demand and North America, and Asia was partially offset by a decline and consumables against the comparable quarter, where customers stocked up on inks at the onset of the pandemic.
We also saw a nice pickup and serialization software sales and textile printer sales remained soft as global apparel and retail remains impacted by Covid and consumable volumes were up as we significantly improved inc. Attachment rates and we saw encouraging improvement and the pipeline of new printer sales as the quarter progressed.
Margins improved slightly and the segment and higher volumes and we were able to offset material cost inflation with strategic pricing during the quarter.
Pumps and process solutions posted 18% organic growth and the quarter of improved volumes across all businesses, except for precision components of.
Order rates and shipments for Biopharma connectors and pumps continued to be strong.
Just drill pumps had a solid quarter, driven by improved and market conditions and distributor demand.
And polymer processing shipments grew year over year on robust demand in Asia and the U S.
Precision components was down and the quarter, though demand conditions stabilized and hydrodynamic bearings and compression parts as well as broadly in China through new OEM builds remain intact.
Adjusted operating margin and the quarter expanded by 890 basis points on strong volume favorable mix and pricing.
And this team as move this segment to best in class topline and bottom line metrics through a dedication to operational excellence robust product development and innovation management and proactive and purposeful inorganic actions. It's a world class collection of assets that we will continue to invest behind.
Refrigeration and food equipment continued its solid momentum from the second half of last year, posting 18% organic growth.
Revenue and new orders and beverage can making more than doubled year over year for.
Retail saw broad based increases across its product lines as key retailers resumed capital investment and.
Programs.
Plus we've seen good demand for some of our new product introductions and customer wins.
Our natural refrigerant systems business in particular ex.
Experience robots robust demand in Europe.
And the U S. As customers are adopting more environmentally friendly solutions and heat exchanger business grew and robust demand in Asia and Europe across all end markets food.
Foodservice equipment was down and the quarter, but saw stabilization and chain restaurant demand.
Despite operational challenges and food retail due to availability issues with installation raw materials adjusted margin performance improved by 450 basis points supported by stronger volumes productivity initiatives and cost actions, we took and the middle of 2020.
Partially offset by input cost inflation.
And I'll pass it to Brad from here, Thanks, Rich good morning, everyone.
I'm on slide six.
On the top of is the revenue bridge, our topline benefited from organic growth across all five segments, with particular strength and pumps and process solutions and refrigeration and food equipment segments FX.
FX benefit of topline by 3% or $51 million acquisitions more than offset dispositions and the quarter by $15 million. We expect this number to grow in subsequent quarters.
The revenue breakdown by geography reflects strong growth from North America, Europe and Asia.
Our three largest geographic regions the U S. Our largest market posted 7% organic growth and the quarter on solid order rates and retail fueling marking and coding biopharma connectors food.
Food retail and can making among others and was partially offset by delayed shipments and waste falling.
Europe grew by 13% and the quarter of.
Strong shipments and vehicle aftermarket biopharma industrial pumps and heat exchangers.
All of Asia returned to growth and was up 20% organically driven by China, which was up 60% against the COVID-19 impacted comparable quarter in the prior year.
Moving to the bottom of the page bookings were up 27% organically, reflecting the continued broad based momentum.
We are seeing across the portfolio and.
And the quarter, we saw organic bookings growth across all five segments.
Overall, our backlog is currently up $626 million or 39% versus this time last year.
<unk> well for the remainder of the year.
Let's go to the earnings bridges on slide seven.
On the top of the chart adjusted segment EBIT was up nearly $100 million.
On margin improvement.
Margin improved several hundred basis points and as improved volumes continued productivity initiatives and strategic pricing offset input cost inflation.
Going to the bottom of the chopped.
Adjusted net earnings improved by 60, and as higher segment EBIT more than offset higher taxes as well as higher corporate expenses, primarily related to compensation accruals and deal expenses.
The effective tax rate, excluding discrete tax benefits was approximately 21 seven for the quarter compared to 21.5 and the prior year.
Discrete tax benefits were $6 million and the quarter were approximately 3 million and lower than in 2020.
Right sizing and other costs were $4 million and a quarter or $3 million after tax.
Now on slide eight we.
We were pleased with the cash flow performance in the first quarter with free cash flow of of 146 million of our $110 million increase over last year.
Free cash flow conversion stands at 8% of revenue and the first quarter, which is historically, our lowest cash flow quarter due to seasonality of our production.
Let me turn it back to rich.
Thanks, Brad let's go to slide number.
We expect demand and engineered products to improve sequentially through the remainder of the year, which is supported by a robust backlog.
We continue to see strong result, we had strong bookings trends and vehicle services and industrial automation aerospace and defense of significant revenue visibility through its government programs and has booked well into the second half of the year.
Order rates and waste handling improved significantly during the first quarter, though the shipment schedule will be levered towards the second half and we are watching the supply chain here closely.
Which is of stabilize and we expect a gradual recovery through the second half of the year.
As communicated at our Investor meeting in November we expect fueling solutions to postmodern organic growth for the year.
There was a known headwind for me M V roll off and the U S, but order trends support a number of positives offsetting it.
Putting growth and systems and software recovery and underground businesses and growth and vehicle wash.
We also expect that Asia, taking China in particular should stabilize and become a net positive for us and the second half the Ics acquisition acquisition, which we closed at the end of last year is off to a very good start as vehicle wash market is recovering healthily.
Imaging and I'd is expected to perform well this year, our core marking and coding business of stalwart in 2020 is expected to continue to deliver.
Low to mid single digit growth with services and serialization products positively impacting performance Digi.
Digital textile printing remained slow, although we saw a year over year improvement and ink tonnage sales in Q1, as we continue executing our strategy to attach consumables to machine sales, we expect recovery here and the second half.
Pumps and process solutions should have another solid year demand for Biopharma and hygienic applications remains robust and trading conditions and industrial pumps rebounded quickly and the first quarter and momentum should continue.
Our recent investments and Biopharma capacity repression, and we are well positioned to continue capitalizing on the secular growth story of plastics.
Plastics and polymers is expected to deliver steady performance as a global shortage of plastic and rubber as well as petrochemical investments are driving increased investment and processing plants.
Precision components of stabilize and we expect it to contribute to year over year growth continuing and the second half of the year.
And with large backlog and high order rates refrigeration and food equipment is expected to have a strong year, new orders and the core food retail businesses have been healthy and the last few quarters.
As retailers that had paused their remodel programs last year amidst the pandemic are restarting these strategic initiatives. Additionally, we are capitalizing and our leadership position.
And natural refrigerant systems, both in Europe, and also in the U S, where we believe the recent mandate and California will foretell a trend among the other 49 states to mandate that transitioned to more environmentally friendly solutions.
We also see good growth and our specialty product line and small format customer segment.
<unk> continues to work through our record backlog and had another significant bookings quarter and Q1. They are booked for the year, our heat exchanger business and seeing strong order rates across all verticals and geographies, we are investing in capacity and new capabilities and these two businesses and are well positioned to capture.
Demand has stabilized and foodservice equipment.
Restaurant chains.
And we expect the institutional business to recover and the second half.
And our students returned to schools and traffic improves and stadiums and hotels.
And our revised annual guidance is on page 10, we covered the most pertinent of those items are of the slides and you summarized and here for your reference.
And finally on slide 11 puts expected 2021 performance and our multi year perspective and are.
2019, Investor presentation, we highlighted how the changes dover's portfolio over the prior decade shaped a less cyclical business.
<unk> attractive through cycle returns.
<unk> 'twenty 'twenty was proof of lower topline cyclicality and of demanding environment and our ability to protect profitability.
Operational excellence and operating margin expansion has been our priority of priority over the last couple of years and and we are on track to deliver more than 100 basis points of average margin expansion over that period, and we of the playbook and tools for this to continue Dover is positioned to deliver attractive double digit EPS growth in line with our long.
Term corporate targets communicated in 2019.
Before wrapping up I'd like to thank everyone at Dover for their hard work delivering these results and the continued presence.
Present here.
And that's the end of the presentation. So Andre we can open it up for Q&A.
Thank you if you'd like to ask a 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. Our first question comes from the line of Steve Tusa of Jpmorgan.
Hey, guys. Good morning, good morning.
Rich. This is the most excited I've I've I've heard you in and a while weighted way to jump out of your shoes there.
And the kind of rest of the year of guidance.
And just wanted to kind of get an idea of you mentioned there are these kind of like.
There were bookings tailwind this quarter, but not necessarily revenue tailwind, but when I look at kind of the rest of the year and I just kind of simply divide the rest of the year guide quarterly just to get to a quarterly number and.
Keeping in mind, the first quarter is usually like a pretty low number seasonally.
Seems like sequentially to the rest of the year quarterly did you have you know.
EBIT of it.
Kind of softening and actually down sequentially and sales basically kind of flattish for the rest of the year just on a quarterly kind of simple quarterly divided by three of rest of your divided by three so what.
Is there something like.
The fundamental that'll drop off other than E. M V I mean.
You've mentioned a lot of these businesses have a second half of it actually looks pretty.
Pretty good and anything we are missing.
On this front.
No look I mean at the end of the day Q1 was stronger than we expected. So I think that we're quite pleased and our ability.
And to pivot operationally to.
And to get the product out the door I think that we're probably being.
Arguably conservative to get another quarter under our belt to see.
How much of that backlog and demand is being influenced by.
Channel restocking and trying to get in front of raw material perceived price increases for the future. So.
And I'm not entirely clear right now how much of Q1 over performance was taken from Q2, which is seasonally when we kind of ramp. So it's usually a low Q1 big move and Q2 Q3, and then kind of run for cash and Q4.
And whether that whether we were.
And where that.
Can't do the math and say well historically, it's been this percentage of revenue and operating profit and this is what the seasonality is and if I take Q1, as a proxy and I run my spreadsheet. It kicks out of an extraordinarily high number both on the revenue side and the operating margin side. So from the revenue side I think for.
Fair enough and we may be a little conservative we'd like to see our bookings go through Q2, and I'll tell you sitting here in April and it.
It's not deteriorating which is of good news so that.
That portends, a pretty decent Q3 that we've got coming up but.
We'd like to see how of that.
Develops over time, because make no mistake because of couple of things here.
Operationally it is getting kind of difficult out there in terms of sourcing raw materials.
Labor availability.
A variety of different things out there and we had some headwinds and the first quarter, but I'll tell you that operationally.
We plowed through.
We're not out of the woods, yet right now, we missed shipments and both ESG and into and retail refrigeration because of component availability I don't really know yet, whether that's kind of get better or worse.
My final comment on I know this and a long answer but you are at the head of the line and this is going to be the question and we knew we were going to get is from a margin point of view and I think that I discussed this at the end of 'twenty.
The incremental margin expectation for Q2 because of the comp is so good.
It's been overstated on margin because of our ability to use.
Furlough mechanisms that were subsidized by the government, meaning we could take.
Production people off of our payroll because we had subsidies and place to account for it.
So you actually have a snap back of course now we're in pretty good shape, because our revenue is up so much. So we should be able to absorb it but I think by and large when I've seen that there is an expectation of industrial world, where the incremental and Q2 margin performance is a lot higher than we would expect.
The second answer on the margin performance of the balance of the year is we really expect to accelerate.
In refrigeration over the balance of the year. So we've got this big backlog, it's up to us to get it out.
So the as out of out of the growth that we expect in the balance of the year a lot more of that growth is going to from.
Duration than it was in Q1 and as you know that is dilutive to margins as we go forward. So.
I would caution you not to take Q1 incremental margins and just multiply it by three.
One last question and this is Q2 or Q2 EPS.
And what will they actually growth sequentially.
Q2, EPS, yeah, yeah, yeah without question.
Okay got it thanks.
Your next question comes from the line of Andy Kaplowitz of Citigroup.
Hey, good morning, guys nice quarter. Thanks.
Thanks, Andy and rich.
Maybe following up on margin you know you've been asked before about achieving a 20% adjusted segment operating margin. Many times you did just record over 19% and obviously a strong quarter, there and we know of one quarter doesn't indicate a trend, but it's 20% of long term target maybe too low at this point given how well your.
The operating and the businesses.
And while it didn't expect that one two and a handy.
Look I'll put it this way where we're pleased with the operational performance and we're pleased with the mix impact on the operating margin clearly, reaching 19 at the segment level.
In Q1 of 'twenty one 'twenty.
20, I guess is earlier and reach then and even we had been modeling and in the past.
Now that is going to be I'm, not going because of this big mixed discussion again.
Yeah.
I guess over the balance of the year. So number one and the answer is we're going to get to 20 earlier than we thought based on current trajectory. So what that means I'm not putting a target out there yet we'll give you one.
Maybe in Q3.
What we are going to fight against between now and the end of the year. We've discussed the mix impact on margins is inflationary.
Input costs between raw materials labor and price cost.
As we discussed at the end of 2020, we were on the front foot in terms of getting price out there.
And I'll think about it in terms of inventory change the inflation on the raw materials was not in our inventory so you'll get positive price cost early in the transition as long as and stay on the front foot now we're gonna be really closely watching price cost of the balance of the year in terms of net.
<unk> so.
We would have expected to get the biggest benefit in Q1 and by and large that's where we expect it and the way. It's looking we may have to intervene on price again and certain of the businesses over the balance of the year, so and that's going to and from that and that will impact the.
And the margin performance so.
Yeah, I mean look 'twenty 'twenty when we put the target out there was 400 basis points improvement I think from new from the time period, we put it out there.
Clearly I think it will be revisiting those longer term targets sometime this year.
Very helpful. Rich and then just following up on your sort of confidence level and the RSV and the sense that you've got now a couple of quarters of revenue and backlog of I did notice you talked about you know and increasing capacity and build back and heat exchangers and so you've said before rich that you know it could be a multi year cycle and this business because of content.
So it will go up around that sort of comment and the past E. Do you see potential for double digit grill as you know mid teens margins.
And as the comments of loving ran at higher now.
Well, it's getting higher with every passing month of the of the backlog build so if you go back and look at the comments.
Refrigeration gets a lot of the color of the biggest piece of the segment their backlog continued to build that's the one that we said that we're relatively confident that we are and kind of a secular growth period for we would say 36 months and what we can see it I think it's being augmented now by transition.
C O two which should be somewhat of a tailwind that we didn't really recognize maybe even six months ago. So I think that's helpful.
I mean, how long the.
Transition from expanding capacity and can making and the transition from P. E T to aluminum how long that goes.
Remains to be seen but we as Brad mentioned and I think and his comments were booking well into 22 now.
On the heat exchanger side I don't I think that we are outgrowing the market quite frankly.
We've got some unique positioning, especially and and heat pumps, we are expanding capacity.
And now so based on new product launches and expanded capacity I think that we can outgrow the market, but generally speaking that's of low single digit growing market over time.
And we'd like to see if we can push through and kind of outperform.
Thanks, Rich I appreciate the color. Thanks.
Your next question comes from the line of Jeff Sprague of vertical research.
And thank you and good morning, everyone rich thanks for all of that great color on the supply chain and stuff.
It doesn't sound like it's.
The stuff, that's front and center and everybody's mind I E semiconductors, it sounds like it might be kind of more basic sort of stuff could you actually.
Elaborate a little bit on the on the types of pressures, you're seeing and how widespread they are.
Sure.
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I think <unk>.
Most of it look we have some exposure on.
Electronic components, it's not huge but it does impact of a few of our businesses and that is more not chip based that is logistics supply chain base. So you can go take a look of what's going on.
And the port of Los Angeles, right now I'm, hoping that that will on buckle now that COVID-19 seems to be passing but a lot of that is just moving the materials that are sourced out of Asia.
But the whole freight logistics chain is is kind of.
I guess, it's tight right now and its tight and it's reflected in the cost of those the logistics cost that we've had to bear and its tight in terms of getting the deliveries. We want so you know, but then like anything else of Dover becomes very anecdotal because we're not you know.
And the vertically integrated industrial making one products that we've had issues of hydraulic components and ESG, we'd have issue with lighting systems in and refrigeration. So I mean, just a laundry list of things, but for the most part it's.
Let's call it.
Supply chain logistics constraints that are impacting us.
Right understood and then Paul.
Process margins did look.
I guess I could say of awesome.
I would assume there's a an unusually rich mix in the quarter, but maybe you could just provide a little bit of color on.
You know what you think kind of normalized margin rates are and that system.
Yeah.
It is a very good mix in the quarter I mean, we made that presentation last year about our biopharma and single use pumps business I would caution kind of <unk>.
Tried to give everybody an idea of what that business is capable of delivering ash.
So that was of business because of its capacity utilization is running is converting at gross margin level right now.
Which is.
Very healthy.
We're watching it closely right now it is actually of short cycle business for.
Trying to build our backlog, but we really don't have a lot of visibility. So I think that we're I think we're being prudent in terms of our second half estimates in terms of how long that goes.
On the industrial pump side, it's actually been quite robust also but that's more of channel inventory.
Interestingly, we had a very good performance in China.
And the pump business in Q1, and it's been some time since we've seen that and the margins were quite healthy and you have to recall that.
Management had been very proactive and taking costs out.
And in 'twenty and so we of the roll forward benefit on the industrial pump side on the margin.
And moving into 'twenty, one and so.
That was quite healthy I think on pumps and polymers.
This is a business and I think that the management team has effectively doubled the margin and the last three years.
So gross margins and that business are healthy again.
So overall, it's what's going to impact of margin. The most is going to be mix.
Even when precision components does come back and the second half, it's not overtly dilutive to it.
Slightly so the bigger issue is going to be how does demand hold up on single use pumps.
And the second half of the year.
Right understood I'll pass it.
Your next question comes from the line of Julian Mitchell of Barclays.
Hi, good morning.
And maybe.
Just a first question around just the organic sales outlook. So how do you loud and clear from the RFP.
Better as you go through the year I just wondered if you could revisit perhaps you know the organic growth outlook by segment you gave numbers on the queue for coal for each one just wanted and the context of your higher organic growth guide them.
And it looks like about two points, maybe from white, which for the divisions that really led to that organic growth increase for the company overall.
Well it looks like.
Start at the top.
And if our capital goods businesses.
And in the second half as we expect that wood.
Our original forecast.
I think its vehicle services group looks to be poised to get a probably a full point of organic growth that we did not expect at the beginning of the year.
The printing and I'd business is performing as expected.
Clearly the upside as if textile comes back and a robust fashion and the second half right. Now we don't have the backlog that would support that thesis, but if it turns.
Probably of a lot more color on that one and the at the end of the second quarter.
DFS.
Looks like it may have a point if not to one of those points is based on the acquisition that we and the acquisitions that we've made so you get a point of growth there.
When that rolls into organic or not I'd have to look into calendar <unk> and blah blah blah, but.
In terms of told of that's why we gave out total growth and.
Early on here and didn't try to parse of between organic and inorganic, but we may get a point of growth, we'd like to take a real close look oh, PW ore and the underground portion of it and CRM for Belgium hanging hardware, but we would expect that to get better over the year offsetting what's what's likely.
To be the negative ENV headwind that we have on the above ground side and the second half I think that I'd just add.
Yeah.
I answered, Jeff Sprague's and question about pumps and process solutions, So I've gone through that one.
And look.
Our backlog in D. RFE bell of Vac, adding to its backlog doesn't do anything worth of revenue I mean, theyre going to part of its purely execution now how much of that backlog. They can realize and we've just expanded capacity and there to help them do it.
And I think the outlier is gonna be refrigeration. So we've got a real robust backlog that is a short cycle business. So we don't have I think we may be eating into the beginning of Q3 right now in terms of orders and we don't have so we don't have anything for Q4, I think we probably need another quarter to.
Kind of get that tightened.
<unk> tightened down.
Thank you very much and then.
Definitely the operating margin you sound very confident and that 30 percentage.
Conversion range off.
Gulf of highest sales number.
And the free cash flow margin guide.
As you know similar to before.
Hi of free cash flow I, suppose and dollars because of the revenue guide increase.
Our capex guidance unchanged. So you just kind of dialing in and maybe look it's a very complicated operating environment that may put some extra strain on working capital of.
Over the next six months, maybe just help us understand what.
And what impacts we see in the.
Cash flow from these constraints on components and so for them not so much of the P&L.
Okay. A couple of things, we are giving latitude to our businesses to build working capital.
And to compete for market share.
At this point.
Number one and number two I think that we mentioned at the end of the year, we had given some latitude and working capital to pre buy their own raw materials to get and getting in front of what we expect it to be inflationary environment. The fact of the matter is in Q1 and the performance is based on a couple of things number one we did not.
Our payables balance exiting 'twenty was was not as high as it had been in previous quarters. So there wasn't a snapback in terms of of making those payables and Q1 that we've seen in the past and.
And quite frankly, our conversion of velocity of working capital and Q1 because of the revenue was what it was was a lot higher than we would normally see so look and.
And you hit the nail on the head in absolute terms of if we're guiding the revenue up and the margins it looks like its proactive and and absolute.
Dollars than free cash flow should move at the same.
We're working really hard on it and I think that would be probably like a quarter or two to revisit the metric as a percent of revenue, but for right now I think we're confident.
Absolute dollar cash flow will be would be quite healthy.
Great. Thank you.
Yes.
Your next question comes from the line of Andrew Open of Bank of America.
Yes, good morning, good morning morning.
And just a follow up question on sustainability of margin and.
Pumps and process solution.
Have a sense on dynamic between particular and Biopharma.
When the base business and diagnostics and other COVID-19 related stuff just sort of thinking if you will.
Life Science companies. Some companies are more exposed to test some of those may turn negative next year, but that other companies and say hey, going into 'twenty, two and if there isn't enough base here building that it's going to be of sort of sustainable growth into 'twenty. Two so how should we think about that business.
Well I mean, you basically have the Q&A that we give to the person that runs that business for us and we try to unpack that.
The only recent data that we do have is that development for follow on vaccines looks like it's quite robust number one and that there was a view at some point that.
You were going to move from skid development too much.
Larger incubators over time and that transition is negative to single use and we don't see it right now now.
Does that change between now and the end of the year, our view I'm sure. It will change every quarter as we worked through it so and that's why.
We're being a bit cautious in terms of the duration of the demands that we have and that particular sector. Because if it goes to large incubation and then the volume or the demand. This is a business and thats been growing and the high teens for 24 months now.
And when that begins to rollover right now we don't see it.
I can tell you that right now we are expanding of capacity again in the case that.
It's durable.
But it's hard to say right now.
Great and so thank you and.
Just sort of thinking about refrigeration.
And just sort of a.
What I'm trying to get of sort of thinking about normalized margins for refrigeration. When do you think we will hit normalized volumes and how should we think about incrementals and refrigeration you did say, it's going to be negative for the mix, but given all of the restructuring.
And could.
And these guys have high Incrementals on corporate average for the rest of the year. So two questions.
I don't know I'd have to go do the sums for corporate average, but our expectation that they will be of larger contributor to year over year profits.
And at minimum Q2 and Q3.
Gotcha.
I'll take that thanks a lot.
Welcome.
Your next question comes from the line of John and Jeff Gordon Haskett.
Thank you good morning, everyone, Hey, rich I'm wondering if we could just maybe provide a little bit more context around your strategic pricing.
You'd like to offer so sort of what businesses.
Are you raising prices what businesses do you still have to raise prices for and what's the channel reception I mean are of as.
Everybody else doing it too and.
Just any kind of context, you could provide us just also kind of get worse as we go throughout the year or do you think it's going to be kind of hold where things are.
Can I say hard to say John look.
We are raising prices.
This all started with raw materials.
So you can go through our portfolio clearly that the capital goods side, you've got the big ex exposure to the raw materials and they were on the front foot at the beginning.
And from what we can see so far it looks like the entire complex is following along now it takes.
You know 90 to 180 days to see what real realization is because you get pricing out. There then you got inventory turns and blah blah blah.
So that's where it started.
But the fact of the matter is.
Get it that the fed doesn't want to recognize inflation, but there is inflation.
And it's not just of raw materials, because raw materials are and the sub components that we buy from our vendors who are trying to pass along the same kind of price increases that goes into our bill of materials and everything else and clearly at the assembly level.
On labor.
Availability is becoming a problem and that is beginning to start to move up labor costs over time. So it's now gone from you know whats the capital good size that are buying a lot of raw materials now it's moving into the assembled components portions of the business that is going to have to accommodate that over the balance of the year.
On top of that as I mentioned before logistics costs.
A lot of product that's F O b. So we're not it's more inbound logistics costs and it is outbound logistics costs.
Freight costs are going up because you're going out I mean, God forbid you have to airfreight anything right now.
It's a bit of of negative so.
We are going to be on it in terms of price cost.
And it's hard for us because of the disparity of the Skus that we have and this portfolio its not like were making cars.
So we're going to be on it and it's a trailing number and we're going to have to do it as a combination of as the numbers come out and our intuition going in.
But.
At worst it's going to have to be a scenario of a net neutral.
At worst Okay does this and interestingly enough does this for.
Ride of framework or opportunity for Dover, if these technical of inflation or of these chemicals of inflation really kind of proliferate to start to raise prices, perhaps not on so a bunch of surgical basis. So it sort of implied in your answer as the channel is not really resisting people aren't saying excuse me you can't raise prices in this regard will go to a competitor.
Or whatever.
I mean, none of us want to see rapid inflation, but if theres model of inflation that's across the board can Dover start to raise pricing and the other areas that maybe arent quite as affected but still help your profitability, particularly if the channel is kind of more willing to accept because of general inflation and why blah blah.
Well I guess the answer is yes, but let me give you. An example, we have raised prices in refrigeration and lost volume because of it.
Because of that we're more interested and that particular business to raising the operating margin and as a material.
Component of the market structure, it's up to us and lead the market and stop complaining about the fact that theres no pricing power and it. So that's an example, there we've got certain other businesses where grow our gross margins are significantly higher and there we may waive it off because if we've got and opportune.
80 to grab share now is the time to do it so.
We don't manage the portfolio.
And giving a you know here's of three bullet points and everybody go executed and we do it based on market structure of competitive environment and a variety of other things. So it's a combination of a variety of things.
You know, whether it's price that falls to the whether it's whether it's price cost.
Positive day falls to the bottom line or market share gains and gross margins that fault of the bottom line, we'll take it either way.
Got it thank you I appreciate it.
Your next question comes from from the line of Scott Davis of Malleus Research.
Hey, good morning, guys, Hey, Scott.
Oh.
Rich I don't think you mentioned in your prepared remarks anything about the M&A pipeline is there and.
Any light at the end of the tunnel with the higher valuations that youre seeing out there or.
Availability of assets.
Well.
And the I guess the good news Scott is is that as our margins move up.
We we can be more expansive in terms of what the multiple of is willing to pay because if we wound and the clock back a couple of years ago, a lot of what we looked at was trading at a M.
At a much higher multiple that we're trading at and we've gone a long way of fixing it and so.
Yeah, I mean, we're looking at some interesting things and the pipeline look at the cash flow. This year is proactive and sell.
As I mentioned at the end of last year that we're going to make it some.
Quicker decisions, probably this year in terms of.
Capital deployment or capital return.
And so yes, I think that that you know.
Look the management team here was challenged to deliver margin accretion over time on the base portfolio and the tradeoff was if you do so that we're going to reinvest and your businesses. We've done that on an organic basis and a meaningful way I think that we've got.
We've got certain portions of the portfolio that of earn the right now to be a little bit more expensive inorganically. So more of that we're probably more on the front foot today and then we've been in my tenure here.
Okay. Good and then you had mentioned that one of the conferences a couple of new automation projects that.
You guys are doing I think and and.
Vehicle and waste, but can you give us a little bit of color on those projects and and any sense of how do your cadence and stuff like that into an up cycle and you are trying to.
Managed high demand, but also.
And you might have some downtime and such to implement projects.
I mean, you got to be careful I mean, I think that we've done a few of them here now so I think that we're getting better at them in terms of.
How much inventory do we have to pre build to accommodate for execution risk.
I'm confident.
I think the two bigger ones that we have going on right now we've got.
And just like we did and refrigeration.
The floor space to accommodate.
Kind of the Capex portion of the project.
To run on the.
On the installed base.
So you've got a transitory period, but it's not as if you have to shut down to redo the plant and and and do it that way, it's kind of if you build it on the side and you just open it up over time.
A lot of what else. We're doing now is we're doing a lot of work on the machining centers and Thats.
And.
Productivity related.
And that's.
We're spending pretty heavily and right now and that's and on some of our lower gross margin businesses. We're trying to kind of bring those up over time and we've got some real interesting ones going on.
And some of our higher volume volume throughput businesses, an inspection technology that is allowing us to increase capacity without expanding the physical footprint and that's the one I referenced before and the Biopharma side.
Okay helpful. Good luck guys. Thank you.
Your next.
Comes from the line of Joe Ritchie of Goldman Sachs.
Hey, good morning, and great quarter guys.
Thanks, Joe.
Rich.
Talk a little bit about inventory levels, being low and and the demand environment remains robust and it's clearly like non a pull forward and demand and I'm. Just wondering like when you think about raw material availability and <unk> and some of the supply chain disruption that you saw.
Is there a certain amount of revenue that you bet that you Couldnt book and <unk> that got pushed out into Q2, and maybe maybe some color around that would be helpful.
No I mean overall as a corporation, we over delivered with what I would've expected that we could of forced through the funnel.
And I told you about the meetings, we're having around here in early January about our Q1 and forecast.
We were yelling at everybody about.
Moving them up.
And then we've got a lot of demand and I would have expected that we would have had we had anecdotal issues that I referenced but the fact of the matter is in total we over delivered and so what went on and pumps and process solutions has of holes and their ability to get that amount of product out and.
And of intra quarter period, where they actually didn't even have all of those orders I think it was was impressive. So we did lose some volume and ESG, we lost some volume in refrigeration, but overall, we over delivered and what I would have expected if I looked at kind of.
Backlog conversion expectations going into the year.
Got it that's helpful and I guess, maybe just kind of following on that conversation of it John on price cost like.
And it looks like you've got about 80 basis points of price this quarter and you made some comments around.
Not all of the costs are in place and dairy costs really big and your inventory. So I'm just curious whether it's discussing the price cost impact of <unk> or how you see that playing out for the rest of the year I'm just curious to hear how and how youre thinking. This is kind of the trajectory kind of look like going forward I think that we would have expected to be positive in Q1.
Just because of the timing of our the action that we took on pricing which <unk>.
Actually started in Q4 of last year.
And then because then between what stuck and inventory and then what is pre announced kind of these.
Price increases effective April 1st and how much does that drive backlog and whether you can reprice that backlog.
And as.
I think that we are.
We're vigilant about it I think of.
But bottom line is the only way, we're really going to know is over time.
So I don't know Q2, right now, whether we're going to be price cost, whether it's going to be a credit of credit or debit I think it's going to be of credit right, but between announced price increases and price realization and.
And all of the noise around the sub components, because you can't manage and measure inflation and you can do it for raw materials and castings, because it's kind of bulk orders and you only have a few suppliers, but when you talk about sub components.
Cross this portfolio, it's quite difficult to measure so.
And.
Brad and I were discussing at this morning, I mean, it's the one thing that we've got to really keep our eyes on and look and we will have more color on it by the time, we closed Q2.
That's super helpful. Thank you very much.
Our final question will come from the line of Josh Poker Wenski of Morgan Stanley.
Yeah.
Hi, good morning, guys.
Hey, Josh.
And so.
Just taking a step back on kind of the recovery as a whole here. Richie you guys are going to be back to pre COVID-19 levels pretty soon and <unk> and then certainly before year end of looks like.
Where are you seeing.
Evidence that this is maybe a stronger recovery versus you know why and I used earlier that you know and he had some pent up demand from from 2020. Like is this is this a stronger cycle or is this sort of catch up on stuff that really should have gotten done last year.
All of the above Josh I guess.
And.
Look.
And if we go back to 19.
We've introduced a lot of new products believe it or not between our 19 base and our 21 trajectory.
Also of Ben I want to say overly active and M&A, but we did some inorganic investments from 19 through 21, and so those end up being topline credits.
Forget what the total aggregate demand environment is.
Look the recovery looks like it's broad based at the end of the day I mean, there are trade offs. We're in 19 and certain geographies were stronger and now they're weaker but they have their own reasons why.
I think that the all in one day, we can really point to where there's an inflection of the demand environment is refrigeration, but we talked about that leading into 'twenty, one and where we went through.
Now of three to four year period, where the capital base was underinvested by by Big box retail and now we're going into a cycle, we're calling it.
A three year cycle, let's hope it's for and then you've got some some interesting changes in and.
Structural changes like that are impacting things like <unk>, where this transition to aluminum cans is kind of cyclical where that business hasn't grown and a very long time and now it is making a pretty sweeping transition for <unk>.
Covid reasons, and environmental reasons and so.
The 19 basis important, but we would have expected that if we rebase 19 for new product launches and acquisitions.
That base would.
Would've been higher anyway at the end of the day if that answers your question.
Yeah. It does that's helpful. And then we sort of beat and some of the backlog discussion to death, but maybe just one more.
And for good measure you mentioned that you were able to get a lot of product out the door and the first quarter. It wasn't really a lot of bottlenecks on on your side.
But a lot of the commentary about backlog seems kind of second half focused is there a point at which lead time sort of tempered the order intake that folks hey, I'm not going to get this for a while so I'm going to hold off and see what life's like or is it the and burst.
And because it just seems like there's an awful lot of backlog pretty early and a year.
Yeah, and it depends on the business at the end of the day and the market structure.
And we tend to compete and some pretty concentrated market structures were.
Unless there is a disparity between us and and individual competitor, that's who we're competing with.
I think it remains to be seen whether.
Distribution demand.
Begins to.
That rate of increase slows down because if it's not liquidating and it's not like waiting out of distribution inventory at the same pace and it's coming in and obviously, it's going to it's going to slow down and it's a bit too early to tell.
Quite frankly.
So the long lead time items, where markets are concentrated I don't think it's going to have a negative impact on the short cycle side.
And what we're trying to do on the short cycle side as forcefully build of the backlog because generally speaking the bigger backlog that we are the more efficient we are as producers.
But that is going to be tied up on the competitive environment and and product availability and everything else and we'll see.
Yeah.
Got it that's helpful. Good quarter. Thanks.
Thank you.
Our question and answer period, and Dover's first quarter 2021 earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.
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