Q2 2021 Dover Corp Earnings Call
Good morning, and welcome to Dover second quarter of 'twenty 'twenty, 1 earnings conference call.
Speakers today.
Alright, Richard J, Tobin, President and Chief Executive Officer, Brad The Repack senior.
Senior Vice President and Chief Financial Officer.
And Andre Gallium Vice President of corporate development and Investor Relations.
After the Speakers' remarks, there will be a question and answer period. If you would like to ask the question. During this time please press.
The Star and then the number 1 on your telephone keypad. If you would like to withdraw your question. Please press the pound of key on your telephone keypad as.
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The deal I will now turn the call over to Mr. Andre Kelly of please go ahead Sir.
Thank you Crystal good morning, everyone and thank you for joining our call.
This call will be available on our website for playback through August 3rd and the audio portion will be archived for 3 months Dover provides non-GAAP information and reconciliations between GAAP and adjusted measures are included in our Investor supplement and presentation materials, which are available on our website.
Our comments today will include forward looking statements that are subject to uncertainties and risks, we caution and everyone to be guided and their analysis of Dover by referring to our form 10-K, and our most recent form 10-Q for the list of factors that could cause our results to differ from those anticipated and any forward looking statements.
We undertake no obligation to publicly update or revise any forward looking statements, except as required by law with that I will turn this call over to rich.
Thanks, Andre good morning, everyone.
Our second quarter results were strong across the board and we are especially pleased with the top line performance considering the complicated operating environment the demand environment and the quarter was robust and continued the momentum from the first quarter and despite posting a 30% organic top line growth we exit Q2.
With a sequentially higher order backlog and I'll focus on the bigger picture here and highlight again, what we believe is underappreciated aspect of our portfolio.
Its organic growth potential.
Our revenue and the second quarter was above the pre pandemic and comparable quarter and 2019 and resulted in the highest revenue first half of the year and recent Dover history.
Many of you that the majority of our markets are not simply recovering, but our operating and of growth environment.
New order bookings remained robust with all segments posting book to bill above 1, resulting sequential comparable growth in the backlog as I mentioned earlier operating margin conversion was solid for the quarter as a result of good execution at the operating level and a healthy mix of products delivered in the quarter.
All of this as well and good but make no mistake. The operating environment remains very challenging it's been 90 days since the last time, we were asked the question about the duration of.
Quote unquote transitory inflation and.
As we've discussed after the first quarter, we had some line of sight of raw materials cost trajectory coming into the year, which allowed us to get in front from a price cost perspective. We are also proactively given our operating companies. Some leeway on working capital decisions to build inventories based on the backlog trajectory.
What we underestimated was the was the total cost impacts of the strain logistics system and tight labor market that shows no signs of abating.
This has had to knock on effects on our results first of the absolute cost of inbound and outbound freight were materially higher and second and more important the cost associated with production production line stoppages.
Due to lack of labor and components caused by trends and time of uncertainty and overall supply chain tightness I'll deal with the market dynamics and supply chain impact by business later in the presentation, but based on our experience so far.
And I am concerned about the notion that the current economy needs to be further stimulated and second order implications of that line of thinking and I'll leave it at that.
Our teams have done a commendable job navigating these choppy waters and continue shipping products and driving robust margin conversion and strong cash flow.
Overall, we believe that our operating model.
Has been the advantage to us as we are largely of localized producer and are not overly reliant on extent extended supply chains. This is clearly reflected in our topline performance and the quarter.
As we look to the second half of the year, our order backlogs make us confident of our top line trajectory of our forecasts do not incorporate much and the way of and improvement.
Nor deterioration of the operating challenges that we've witnessed during the first half, we're just going to have to power through and work with our suppliers and customers to adapt to the prevailing conditions. We are raising our annual revenue growth guidance to 15% to 17% and our adjusted EPS guidance to $7.30 a share to 740 cents a share.
There, we also expect stronger cash flow as a result of the improved margin performance.
Skip to slide 4 and which provides a more detailed overview of our results and the quarter and.
The engineered products revenue was up 25% organically vehicle services, which was strong across all geographies and product lines and at record bookings during the quarter industrial automation demand was strong and costs across the automotive sector and in China.
Aerospace and defense posted an all time record revenue during the second quarter waste hauling was flat year over year as the business continues to wrestle with component of the labor labor availability issues that are constraining product shipments and importantly, waste handling bookings were robust and the backlog was up nearly 75% versus the prior year.
Engineered products is our most exposed segments of input and logistics cost inflation due to the materials intensity contractual pricing dynamics and relatively higher share of of international sourcing and vehicle services.
You can see it and the margin and the segment's margin was flat year over year of strong volume leverage and pricing increases were offset by input cost and freight inflation as well of labor and component availability challenges.
Fueling solutions was up 25% organically and the quarter and the strength of the above ground and the blow below ground the retail fueling globally, including some remaining tailwind from the ENV opportunity and the U S. Following the April deadline.
<unk> has had has been strong this year and our recent Ics acquisition integration and performance is ahead of plan activity in China and fuel transport remains subdued, but there are signs of Chinese operators reopening and they're tendering activity.
Order backlogs were up 29% and we expect our software and service business hanging hardware vehicle wash.
And compliance driven underground product offerings to help offset the anticipated headwinds from the E. M V roll off the.
The segment posted another strong sequential margin performance on the higher volumes of strategic pricing initiatives productivity actions and mix.
Sales and imaging and <unk> improved 20% organically and the core marking and coding business grew well on strong printer demand across all geographies with China, and India, driving particularly strong performance.
Serialization software also grew ahead of expectations and the digital texting printing business was up significantly against the comparable quarter.
And much of the operations will wash out of northern Italy last year, but nonetheless, the business remains impacted though we are beginning to see growth and demand for large printers, particularly in Asia and continued growth and ink consumable volumes margins improved by 420 basis points and volume leverage pricing and productivity initiatives.
Pumps and process solutions posted another banner quarter of 34% organic growth of unimproved volumes across all businesses, except the precision components demand for biopharma connectors and pumps contingent.
To be strong driven by vaccine and non COVID-19 related pharmaceutical tail winds.
The industrial pumps grew by over 20% on robust and customer demand with particular strength in China.
Polymer processing shipments grew year over year and continued strength in Asia and is gaining momentum and the U S market precision components of slightly down and the quarter, though demand conditions of stabilized.
And are recovering well and some end markets and geography, giving us confidence and the second half trajectory margins and the quarter expanded by 910 basis points.
On strong volumes favorable mix and pricing.
The top line growth and refrigeration and food equipment continued its impressive clip posting of 44% organic growth revenue and the beverage can making.
Doubled in the quarter and bookings nearly doubled as well the business is now booked into late 2022.
Food retail saw broad based growth across its product lines door cases are now booking into 2020.2 and the demand for natural refrigerants is driving outside growth and our systems business in the U S and in Europe.
Log and food retail is now double where it was last year the.
And the heat exchanger business grew and robust demands and all geographies with rebounding order rates and commercial HVAC in North America, and record order intake and EMEA extending lead times for heat pumps and boilers and foodservice equipment was up and the quarter on a tough comp chain now.
And actually on an easy comp and chain restaurant demand is robust, but the institutional market is still recovering.
Margins in the segment improved by 580 basis points, driven by strong volumes and productivity actions, partially offset by availability issues with insulation raw materials and labor and food retail operations, we expect which we expect to subside and the second half and I'll pass it onto Brad here. Thanks, Rich good morning, everyone.
I'm on slide 6 of the presentation deck on the top of the on the top of the page is the revenue bridge.
Our topline organic revenue increased by 30% and the quarter with all 5 segments posting growth with particular strength and our pumps and process solutions and refrigeration and food equipment segments.
FX benefited the top line by about 5% or $68 million acquisitions added $19 million of of revenue and the quarter.
There were no year over impacts from dispositions.
The revenue breakdown by geography reflects strong growth in North America, Europe, and Asia, our 3 largest regions. The U S. Our largest market posted 25% organic growth and the quarter on solid trading conditions and retail fueling marketing and coding.
Biopharma food retail and can making.
Europe grew by 30% on strong shipments and vehicle aftermarket biopharma and industrial pumps and heat exchangers.
All of Asia was up 38% organically and growth in biopharma, marking and coding plastics and polymers heat exchangers and.
And retail fueling demand outside of China, China, which represents a little over half of our business in Asia. It was up 33% organically and the quarter.
Moving to the bottom of the page bookings were up 61% organically, reflecting continued broad based momentum across the portfolio.
And the quarter, we saw organic growth across all 5 segments.
Going through the earnings bridges now on slide 7.
On the top of the chart.
<unk> EBIT was up $173 million and margin improved 400 basis points as improved volumes and continued productivity initiatives and strategic pricing offset input cost inflation.
Adjusted segment EBITDA was up 350 basis points.
Going to the bottom of the chart the.
Adjusted net earnings improved by $135 million as higher segment, EBIT more than offset higher taxes as well as higher corporate expenses, primarily relating to compensation accruals and deal expenses.
The effective tax rate, excluding discrete tax benefits was approximately 21, 7% for the quarter compared to 21, 6 and the prior year discrete tax benefits were $11 million and the quarter of 9 million higher than 2020.
From approximately 7 cents of of year over year EPS impact.
And right sizing and other costs were 11 million in the quarter or 8 million of after tax.
Now on slide 8.
Sure.
We're pleased with the cash performance of thus for this year with free cash flow of 364 million a $96 million increase over last year free cash flow conversion stands at 9% of revenue for the first half of the year 80 basis points higher than the comparable period last year, Despite a significant investment and working capital.
And the impact of prior year tax deferrals that did not repeat this year.
Also as we discussed last quarter, we remain focused.
On delivering against our customers' strong order rates and built inventory to ensure we can meet the current demand and the second half of the year.
With that I'm going to turn it back to rich.
Okay. Thanks, Brad.
Let's try to pause here for a moment because this is a complicated slide but I think it's.
A transparent view of what we think is going to happen over the second half of the year and includes our current view of the outlook of the second half by segment and provides context of how we are thinking about full year guidance.
Which I'll get to shortly.
And remember the demand environment is strong of course across the portfolio. So let's not try to get over excited about headwinds or mixed commentary.
We managed it and H, 1 and we'll do it again and H 2 but this is the reality of the situation in terms of the dynamic of the business.
We expect top line growth topline and engineered products remain robust and the remainder of the year based on solid backlog and good bookings trajectory.
The momentum in the vehicle aftermarket industrial automation should continue.
While we expect the improved order rates and backlogs and solid waste handling and.
And industrial Winches to drive solid year over year growth and the second half of arrows Aerospace and defense is expected to be modestly down largely as a result of a difficult year ago comparison of product and project deliveries.
Supply chain constraints and cost inflation are expected to continue to have a material impact on this segment of the waste handling and automotive aftermarket businesses are our largest business exposed to the trifecta of raw materials inflation extended supply chains and a larger proportion of assembly labor our management teams are winning and the marketplace considering the headwinds of juices.
Collected and the growth rate and order books, but we are clearly at the point of having defend our market position at the expense of the price cost dynamic, which will be detrimental to near term margins, but not material slightly detrimental and we expect fueling solutions to provide organic growth for the full year above our initial expectations on the back of growth.
And systems and software recovering underground demand and vehicle wash and recall that above ground business as a tux tough second half due to the North American ENV volumes Maher.
Margins of fueling solutions will be up for the full year, though we expect modest margin compression and the second half relative to the first half.
On slightly lower volumes and negative product and geographic mix, which I think we've covered.
The the end of Q1 as with less North America volume due to <unk> and more international volume that's slightly dilutive.
Yes.
Trading conditions and imaging and idea of expected continued their positive trajectory for the remainder of the year of core marketing coating business as expected the maintained its growth trajectory with services and serialization products positively impacting performance.
Digital textile printing is recovering and we expect the end of the year, we will well above 2020, but below its 2019 high watermark, we expect operating margins to remain stable and in the second half.
Pumps and process solutions should see a solid second half demand for Biopharma and hygienic applications remain robust with customers now, placing orders into 2020.2.
And we are strategically investing in additional clean room capacity of this platform to support its growth trading conditions and industrial pumps are strong and driven by robust and customer demand as opposed to channel stocking.
Plastics and polymers is expected to be steady, though this business faces a difficult comparable period due to a strong performance last year.
Precision components were returned to growth and the second half as OEM, new builds will supplement supplant increased activities at refineries and petrochemical plants and we expect margins to remain strong and this segment and we may see some minor dilution due to mix on the back half as our precision components business recovers, but the <unk>.
Absolute profit trajectory of this segment is and very good shape.
With its large backlog and high sustained order rates refrigeration and food equipment will finish of the year strong with double digit growth expected for all operating businesses and new orders of the core food retail business.
Have been healthy across the product segments and the tailwind from our leadership position and natural refrigerants are driving outside growth for our systems business. We expect to begin to significantly ramp up shipments of our new digital door product Bell VAT continues to work through its record backlog. They are now taking orders for late 'twenty, 2 and even into 2020.3.
<unk>.
He'd exchange of business is positioned well as they're seeing strong order rates across all verticals and geographies, we have been investing and capacity and new capabilities and these 2 businesses and are well positioned to capture the growth.
Food service equipment demand has normalized and and returned to growth and restaurant chains and institutional business continues to improve.
And we expect this business to post solid growth and the second half, albeit against the low comparable.
We expect margins to continue the seasonally adjusted upward trajectory for the remainder of the year improved volume leverage productivity gains and positive product mix and business mix should more than offset offset operational challenges related to components and labor shortages and increased logistics costs and input.
Cost inflation.
Moving to slide 10, and we remain on the front foot investing behind our business to support the growth productivity and long term portfolio enhancement.
Organic high return on investment projects remain our top priority for capital allocation on the left hand, you can see the sample of the current growth.
And productivity Capex projects that we're working on that add up to $75 million of spend the project mix is balanced between growth and productivity with the skewed towards new capacity and supporting long term growth and key priority portions of our portfolio.
Our next priority and capital allocation and strategic bolt on acquisitions and enhance the long term growth profile and attractiveness of of portfolio. You can see the width that all 4 of our recent acquisitions for and either digital or high growth single use pumps markets. These are small additions, but we are very excited about scaling.
Up these highly innovative technologies as part of our Triple net portfolio.
And we remain on the hunt for acquisitions have a solid M&A pipeline as we enter the second half.
Current dry powder on a full year 'twenty 1 basis is approximately $3.3 billion.
Our revised annual guidance is on page 11, we are increasing our top line forecast to reflect the durability and demand trends that we're seeing we now expect to achieve 15% to 17% all and revenue growth. This year, our 55 cent adjusted EPS guidance increase is mindful of the supply chain and input.
Challenges, we summarized earlier and the presentation and we expect free cash flow generation to edge higher as well due to margin improvements and the bottom of the page we show our expected 'twenty, 1 performance and a multi year perspective, we remain on track to deliver strong returns of a combination of robust organic revenue growth.
Strong margin expansion and disciplined capital allocation before wrapping up I want to thank everybody of Dover for their perseverance and accomplishments executing and today's challenging environment and with that Andre will open it up to Q&A.
If you would like to ask a question simply press Star then the number 1 on your telephone keypad.
And if you would like to withdraw your question press the pound key on your telephone keypad.
And I ask that participants limit themselves to 1 question and 1 follow up question.
Our first question comes from the line of Andy Kaplowitz with Citigroup.
Good morning, guys switching this quarter.
Thanks, Andy.
Rich can you give more color into what youre seeing in terms of margin progression and pumps and process and refrigeration I know you just talked about it but if you look at pumps and process and you've been sustaining that 30% level can you keep doing that and I know you touched on it a little dilution there and then on the refrigeration side like how would you assess the sort of.
Our march toward that mid teens margin goal that you've talked about.
On the pumps and process.
The solution side of the portfolio nothing deteriorates and the second half of it's just pure mix. So when I'm 1 of what I was trying to make clear is 1 of the businesses that suffered greatly last year and is beginning to improve now is our precision components business that is slightly dilutive to.
And but in terms of absolute profit its a positive so I wouldn't get.
Overly shocked about that on the refrigeration side.
We expect third quarter margins to be the highest of the year.
Just based on seasonality and the size of our backlog and everything else.
Quite frankly, we're a bit disappointed and the margin in Q2 and I don't think that's the fault of management, but we've had a really difficult time with freight costs and components and labor availability. So on 1 hand.
I think the effort on their part to get the product out the door was.
It was excellent and the bottom line is we disappointed and a bunch of customers and our inability to get the product out because of of the supply chain issues. So the trajectory is good and as you can see from the backlogs.
And as this is more of a 2020.2 story now more than a 'twenty 1 story.
That's helpful. And then we know you want to be conservative given all of the cross currents out there, but you know you obviously of forecasting revenue to come off a bit from Q2 with the backlog up 70% you talked about in the coming down supply chain and the various and still out there, but you Didnt mentioned and you released that you have visibility already into 'twenty 2.
And maybe you can just talk about that and visibility and you know.
Obviously, it's and refrigeration, but is it across all of the businesses, so that organic growth could actually be quite strong and you'd go into 'twenty 2.
Well look I mean, I'm not going to complain about the size of our backlog and if you can run the calculus and run the calix on and we Couldnt get it out the door over the balance of the of if we wanted to so it's up to execution number 1 and the.
With the exception of Bell Vac and Maag, most of our business the short cycle.
So we will see at the end of Q through and look at the end of the day and it's the same discussion we had of the end of Q1.
The demand is there it's up to us to get it out the door I think debt when all of set and done I think that we probably are going to do better on average because of art because I think there were advantage from the supply chain point of view versus some of our competitors.
And that's what's going to be winning and the marketplace. It's not so much.
Our pricing dynamic right now, it's whether you can get the product out the door. So we.
And I think that right now and my tenure here, we've never had backlogs like this and it's a good from that.
Thank you rich.
And <unk>.
Your next question comes from the line of Steve Tusa with J P. Morgan.
Hey, good morning, guys good morning.
David.
Just kind of digging into Andy's question, a little bit of a different way.
I think normally you guys convert your first half orders.
<unk> close.
Is it as a percentage in the sales and the from first half the second half.
And obviously that suggests like a kind of of stupidly high.
Revenue number for the year relative to your guidance like $700 million higher.
Obviously, there is supply constraints and things maybe getting pushed into 'twenty..2 can you maybe just talk about like the.
And the mechanics of this backlog whats converting what's different when it comes to the conversion from orders in the sales of the cycle. If you will I mean I'm sure. It's much more extended obviously this cycle of maybe like just mechanically is there a double ordering going on is there.
And our guys pushing deliveries into 'twenty, 2 just a little more and more of the mechanics around that.
Sure.
I think we discussed it a little bit of at the end of Q1, clearly based on our backlogs of exiting Q1 and.
And then Q2 because of the demand function was going to be higher than kind of what is the normal seasonality would be just because of where the demand was so it's just purely a function of where you could get it out the door not at the end of the day so.
That's the that's the good news. So I don't think you can look at Q2, and just say well I'm going to go back and look at history. And then Q3 is this much higher than Q2, and then that it's going to spit out a number as you said, that's that's just not realistic and quite frankly so.
That's point number 1 and so I would I'd be careful about calculating seasonality based on history, just because of the strength of the first half.
Just because of the recovery coming out of the pandemic.
In terms of the backlog, yeah, and you know we'd have to break it down because and we've got some long cycle backlog I mean, we mentioned bell back which is booking into 2020.3 now.
<unk> is a piece of that that will just converted over time.
And we don't believe that this double ordering going on right now.
From what we can tell.
It looks like it's just the recognition by the customer base of the constraints that are out and the system that in previous periods. You just didn't have to put the orders and you want to get in line. So that is what is expanding the backlog I mean, I think you asked the question at the end of Q1 and.
This whole issue of channel stocking Destocking and we took a close look I mean, we grew our industrial pumps business by 20% and the quarter. So we took of we took of our over that actually but so we took a close look at channel checks and we don't see that inventory building up and our distributors. It's just passing.
And right through so that's good news at the end of the day because it means it's fundamental demand.
So I think it's 2 issues, we've got some long cycle businesses that are booking out well further than historically, they used to and that I think on the short cycle businesses I think there's a recognition of the constraints in the supply chain, that's just making everybody getting the line further out than they normally would.
And I and and I guess on that front on.
On the working capital side.
Is there any unwind of this big inventory and receivables I guess not receivables because your sales are going to continue to grow but on the inventory side I mean.
Any flashy C and the second half I know you raised your free cash flow guidance, but.
And if theres anything to nitpick at this quarter would be the working capital build was was kind of sizable.
And the unwind there and the second half I think the working capital build has been to our advantage and we will see after everybody reports in terms of topline and having the product available and are having the components available. The convert has been of the advantage to us I don't see anything fundamentally deteriorating and our working capital we will see and the second half I would.
Expect to see some to see liquidation in Q4, and if we don't on the industrial working capital side that means that the demand outlook for 'twenty..2 is robust and you know what we make carried again, but I don't think debt that just means higher earnings and the out and the outside parent so right now.
Sitting here, we would expect.
Free cash flow and to be up no real deterioration in terms of the metrics of working capital.
We'll leave it at that to see how order rates progress over the balance of the year.
Thanks, a lot thanks.
Your next question Thomas from the line of Jeff Sprague with vertical research.
Hey, Thanks, good morning, everyone.
And you need.
Hey, rich, maybe just touch a little bit more on M&A right.
Doing some bolt ons, but as you noted we've got kind of a multibillion dollar capacity here.
Activity seems to be picking up and your neighborhood right I Wonder if.
And as these things kind of trading away from you that you're interested in more of just kind of the action ability of what you might have and your pipeline.
Yes without getting into the specifics.
I think that we lost out on 1 deal that we chase pretty hard due to valuation.
Some of the other ones that you've seen the transact, we're well aware of those assets and we're not participating in them.
Bottom line is that it's a good news bad news story I mean, the bad news is is the valuations are what they are and I believe as debt.
The good news is because valuations of what they are then theres a lot of building up that wants to come to market. Because I think this is a recognition of these of the salad days for.
Multiples of not even earnings anymore, but of whatever you want to choose to be the multiple cell.
We're looking at a lot of stuff right now and we're going to remain disciplined I mean of things of the things that we've got there are small, but we think that the network effect and the leverages those small products is.
Our expectation of the returns are going to be very high and the deals that we did.
And we'll see and then the second half.
And the unrelated different question just back to kind of price and how you're managing all of this.
What what are you doing differently I'm sure you can use the demand pulse to just extract price that people want the product bad enough, but are you able to.
Drive deposits do other things just kind of improve the commercial terms of how you're transacting with folks.
Uh huh.
It depends.
I think because demand is high and capacity is tight.
You can manage profitability by customer and probably a little bit more efficiently than in the past.
But I think in certain of our businesses and I'll go back to what I talked about it and engineered products.
You know.
When you get to the third price increase do you actually go for the fourth price increase because of the fact of the matter is you run the risk of demand destruction and the short term.
And that's not good so part of my comment about engineered products, especially around <unk>.
E S G and V. S. G is at a certain point, if we go negative and in terms of price cost, but the volume of remains robust and the installed base goes up that's a better trade because we believe that some of the supply chain constraints and raw materials were roll off hopefully sooner than later.
And.
Do you really go back to your core customers and say you know sorry, but here comes another price increase so.
That we're managing.
Differently across the portfolio, but we don't want of force short term demand destruction by trying to just be draconian.
Great makes sense active active management appreciate it thanks a lot.
Your next question Thomas from the line of Andrew <unk> with Bank of America.
Hi, yes, good morning.
Andrew Hi.
Hi, how are you.
Just a question just to sort of to continue and sort of to talk about capital allocation and you did sort of highlighted over $3 billion and dry powder.
How should we think you sort of clearly have established yourself was 1 of the most consistent of operators.
The Covid. So how do you think about sort of the pace that you would like right.
I assume that valuation stay where they are but how do you see the pace of capital allocation per year in a normalized environment, assuming that price to stay where they are.
I don't know how to answer that I look up and I'll put it this way Andrew.
We realistically looking at right now.
Is about 2 thirds of our dry powder.
Now do we execute on that or not I'm not sure, but just in terms of the amount of targets and the.
And a realistic view of what the value of those targets are is about 2 thirds of our dry powder. So it's you know it's quite a bit at the end of the day.
But it's a realistic view and.
There are some deals that we just can't get there I mean this this this this notion that return on invested capital and made a quantum leap from 3 to 5 years over the last 12 months I find and interesting dynamic and I'm not here to criticize of anybody's deals everybody's got their own strategy to a certain extent so.
And.
My like I said before to.
The Jeffs question and the Bad news is valuation the good news is there's a lot of assets that see valuations of transactions and the marketplace. So the.
The Mount of opportunities that are out there and ones that are rumored to come is actually proactive to capital deployment.
Okay, great and so thank you and then.
The question, maybe I missed it but did.
Could you comment on what the price increase was in the second quarter and what are you modeling for.
The second half of the year.
Of the.
Price to raw materials and crews in the second half of the year vs.
The outlier.
Is logistics costs and lines.
And it was really the the negative headwind.
But price cost.
The raw material side, its actually better and the second half than the <unk>.
First step.
But what was the price component of organic growth and the second quarter.
2.
And to round that number of them.
Not that significant.
Run times down to Andrew comes down to the timing of when those price increases rich and saying yes.
And there is multiple.
Times that price is being put in so it's not 1 big Bang at the January 1 it kind of spreads across the year. So you get you get that effect.
And if I got it looks out of your price reaction to the I don't think of anybody's complaining about your execution. Thanks, so much. Thanks.
Thanks.
Our next question comes from the line of Scott Davis with Melius research.
Good good morning, guys. Thanks, Scott Thanks, Scott.
Is there any way to kind of convert the rich.
Rich you made the comment of disappointing customers.
Can you convert that to kind of and on time delivery number to us and kind of what's normal and what's you are at now and.
Any way to kind of think about it.
Other than subjectively.
Well I mean, it is really 2 dynamics I think that our lead times are disappointing to our customers because.
You go for years, where you can convert orders within with intra month and some of our businesses, where that's just not possible.
And that.
And that's where you get this function of now everybody has seen it for 6 months and so it's kind of knock on effects of backlogs because there's a recognition of this is this.
This is more durable than maybe everybody thought so it sort of the positive as it builds your backlogs at the end of the day the negative is.
You know our lead times of stretched out and now you couple that with and certain of our businesses, where we have had.
Some pretty difficult logistics constraints and in some cases labor availability and then you've got disappointment of we say, we're going to deliver the product on X date, and we Miss it and that's happened. So we can quantify we quantify and more in dollars and cents.
I'd have to go look up in terms of on time delivery.
I think across the board, it's probably okay, but there is as I mentioned before.
No.
Our business like BSG, that's got probably our longest extended supply chain of suffering the most as opposed to printing and I'd that just doesn't have to deal with the reality of that.
Okay.
No that's a fair point and so just just to follow up I mean, all of the questions on M&A I think are appropriate just given where your leverage ratio is but.
And could flip it over and just say well evaluations of crazy why not sell some assets here because you do have a fairly.
Broad portfolio, and some things seem to fit better than others and.
Is there any appetite to.
Doing so no I think that I think that's a fair comment I guess, that's all I can say about that but you're right right valuations inbound and outbound are what they are and you can manage that both ways.
Okay I'll pass it on thank you guys. Thanks.
Your next question comes from the line of Julian Mitchell with Barclays.
Hi, Good morning, just wanted to circle back maybe to slide 9.
So just to try and understand it.
And essentially is the point here that sort of it is largely relating to a half on half.
Margin outlook.
And so sort of company wide.
The second half segment margins of it might be down slightly versus the first half.
And then within that you've sort of gone.
The E P.
And DFS, maybe down a bit.
The RFP flattish and then the II and the P. P S.
Flat to up.
Half on half is that the right sort of summary of that slide just to make sure it sort of half on half when looking at yes, I think that if you overlay. The my comments onto the slide the theyre going to match right and I think that we're just giving you an honest assessment based on the prevailing market conditions of where we have headwinds.
<unk> price cost and then some commentary on mix, which is the commentary H 1 day age too so.
As I mentioned and my comments I don't think we have to be overly dramatic about it.
And we've managed it quite well and 8 in the first half and I don't expect us to manage it differently and the second half, but we have to recognize that there are certain decisions that we're making like if you look at TEP and terms of price cost.
Which.
Whether from an absolute profit point of view.
And good shape with slightly dilutive margins, because we are just making a choice to chase the to chase the volume, which I think is appropriate in that case.
That's very clear and then secondly.
And then looking at the cash flow, you've you've addressed the working capital point once or twice.
Capital spending is up a decent amount this year I think the sort of low double digit type.
[noise] type increase year on year.
Just wanted to think about sort of the outlook from here.
How much does that reflect the sort of catch up spend.
You laid out some project and the debt after a week of Capex number last year for obvious reasons.
And how much is the sort of the sustainably higher level, just trying to understand how your capital intensity looks from the Capex from beyond 2021 should we see capex normalize.
Lower again, it'll be flat when we look at next year.
Think that 'twenty, we can just throw out right and you made at the end of the day, everybody reacted to the change and market conditions appropriately. So.
As a percent of revenue.
And we'll see where we end up and I don't want to do the calculations here, but as a percent of revenue 19% to 21 is is probably flattish and I would expect that to be the same going into 'twenty..2 I mean, we 1 of these days, we're going to do a presentation on our returns for organic investment and they absolutely bill.
Low away anything that we do inorganically, so to the extent that we find the projects.
Going into 'twenty 2.
And we'll spend it internally, but right now sitting here today do I expect and as a percent of of revenue and 2 it would go up dramatically and 22 net.
That's helpful. Because I think there's a lot of sort of broad the chat about the capex super cycles, and there's some back.
And we think it's a bit of it doesn't sound like from Dover.
Sort of internal outlook, and if theres anything game changing in terms of Capex intensity as we look out well.
Think debt there is an interesting argument and I would I would agree with it that to the extent that that labor inflation is durable and that supply chains. The.
The issues that we're having supply chains will improve but not dramatically. There is an argument to be made that the returns on automation are going to be better than they've been over the last 5 to 6 years and I would agree with that.
Interesting thanks very much.
Your next question comes from the line of Joe Ritchie with Goldman Sachs.
Thanks, Good morning, guys nice quarter.
Thanks, Jill thank sue so I'm going to I'm going to ask Julians question, maybe a little bit more explicitly on the margin for the second half of the year and so it sounds like.
Rich you guys have done a great job managing this historically when I look at slide 9.
Basically what I'm hearing from you is that incremental margin, but probably going to be pretty comparable to the kind of 30 per cent range that you just put up and the second quarter. Maybe there is some slight price here, but that's kind of how youre thinking about this and the second half is that fair. Yeah. I think that we're just trying to be transparent gel right and it's a very nice we could've put up the second quarter results and.
And that everything is great.
And C of next quarter, and then gotten away with it but I think that we have to recognize that there are some issues that need to be overcome to us.
I don't think that we should get overly excited about it and it's just the facts are the facts, we've dealt with them and H, 1 and if anything it becomes more of a mix issue in Q2, and that's not probable that problematic so as I mentioned before.
Dr. <unk> is going to have its best quarter of the year from a revenue and an operating margin point of view. So that's that's great in terms of absolute profit, but it is dilutive to overall group margins. So am I going to tell them to slow down and to protect the margin now at the end of the day and that's the case and there's a couple of other.
A couple of all of it of our businesses I mean, if if precision components on the back half revenue increases, but it's slightly dilutive to a let's call. It a very robust margin that we're clocking at pumps and process solutions again, I don't think its overly problematic, but we're just trying to guide everybody of.
Of a look at the margin in Q2, but.
From a seasonality point of view, if I go back and look and history Q3 is X percent higher than Q2. So let me just model that and run down the field I think that would work.
Give you a number that we would like to get to but I'm not entirely sure just because of the the pull forward in terms of the demand and the operating leverage that we're getting from Q2, and we got to be a little bit careful with the conversion to the back half as well because.
Materials does impact conversion.
So just keep that in mind is that debt has nothing to do with absolute profit per se as rich has talked about but the conversion rate is influenced by that.
Sure.
That makes sense and fully appreciate all of the color you guys of providing I guess I guess my 1 follow up and maybe just kind of focused on the near term per second.
When you think about third quarter.
You know from a from a pure revenue and and EPS perspective.
Would you expect it to be up versus the second quarter or similar I'm. Just curious like how you guys are thinking about it with the way that the backlog of kind of converting them into your bedroom.
Similar.
I guess is the answer.
Okay, great. Thanks, guys.
Your next question comes from the line of Mitch debris with Baird.
Yes. Thank you for taking the question I also wanted to ask the question about slide 9.
You've got.
[laughter] recent next week next quarter of it.
Alright go ahead.
Yes.
Sure.
Yes.
And you've got positive commentary on price cost for the eye and PPS and just.
And just kind of looking through your disclosures and the Q.
These were the segments would frankly, the smallest pricing gains and the quarter and both of them a little over 1%.
So I find that to be a little bit counterintuitive right, you've got less of a pricing tailwind and these 2 yet.
And you expect better price cost dynamic can you maybe put a finer point on this is what's happening with these 2 well I think Brad addressed it and an earlier question and everybody.
It.
We don't do our pricing of January 1st.
It's done differently, the signaling effect to manage backlogs, so you've basically and certain businesses I'll say.
We're going to do a price increase at the end of Q1, meaning so you lose that clocking period of Q1, and so it actually ramps over the balance of the year on the comp so again.
It is just a reflection of the timing of those price increases and the age kind of the H, 1 and <unk> effect of that.
Okay got it sorry, I missed that.
And then I guess my follow up.
And just sort of looking at your order intake right in and refrigeration and food equipment pumps.
Pumps and process solutions in both the segments, you're running well ahead of what we saw pre COVID-19 and.
And I guess my question is.
If we're not talking about some kind of a capex super cycle here, what is really happening with these end markets and is it fair for us of the thing that this is sustainable to some degree into 2022 or is there a hangover and to be expected here as things normalize.
Let me see I think I've tried to answer this about 15 different ways I think that.
The backlogs are building, which is a reflection of.
Constraints and the system.
So I think when we get the next year and is going to be an interesting dynamic because as those constraints come down.
And then lead times are going to come down which is going to be negative to backlogs to of certain extent, but that.
I think that Steve.
Ask the question or maybe wrote it earlier today I think we're going to get we got to be careful with absolute backlogs and the doing math on it and trying to extrapolate.
Revenues into the future I mean, the bottom line is the backlog build and shrink based on lead times and market conditions and everything else and so could I envision a scenario where backlogs come down yes, do I think thats overly problematic no because 2 of certain extent that means the the headwinds that we have on supply.
And logistics of getting better which is better for margins at the end of the day.
Yes, so rich to clarify I wasn't talking about backlog because I totally agree with what you're saying I was wondering more about about your bookings right, which which had been very very strong year to date, even relative to pre COVID-19, yeah, well look I mean, you know I think that we are executing really really well and pumps and process solutions.
<unk> I mean, and we made a presentation on that on what we thought was coming.
At the end of 'twenty and look and as I mentioned at the end of Q1, we think that we are in and a minimum of 3 year cycle of the demand function on DRP.
Which is positive and it's not just <unk>.
It's across the board it's not just.
Door cases, it systems business and sweat on the heat exchangers, and it's <unk> all of which we believe are and a multi year cycle.
Great. Thanks for the color. Thanks.
Your last question comes from the line of Deane Dray with RBC capital markets.
Thank you and good morning, everyone born and good morning, and know we covered a lot of ground here. It came up multiple times about component and labor shortages. So rich if you could just take us through like where is it most acute today on the component side is it semiconductors printed circuit boards and all.
And you're qualifying new suppliers. So that's the components side and then on the labor side and you know.
Any color there unfilled positions are you expecting.
A significant step up and labor costs as as this needs to adjust some.
Take us from that if you could.
Oh boy and while we've got a pretty wide portfolio and make some general comments about the components.
Theyre all tight.
The there are more problematic, if they're large and imported.
Because if you take a look of what's going on.
And the logistics supply chain and the port of Los Angeles, and all of that it is a bloody mess right now.
Which only impacts a small portion of our portfolio because of as I mentioned and my comments at the end of the day, we think that we're winning in the marketplace. Because we don't have a lot of instances of that if you if you've got very long supply chains.
And its containerized freight coming out of Asia back to North America to fulfill demand youre suffering quite frankly.
On the labor side, it's purely and our operations that I have a higher propensity of assembly labor.
Tom.
And for all of the reasons that we can understand.
And that's that's been difficult.
I think it's not getting worse as we moved through the second quarter.
Which is the good news so hopefully.
In September when some of these.
The government influence in terms of of.
Of the labor market begins to roll off and it will get better and everybody is going to go back to school in September. So our view right. Now is it's probably going to remain difficult through August and I think that we're hopeful and September that the situations.
That's real helpful. And then last 1 from me just you talked about this last quarter and how did it play out where you said you were going to give the business units more autonomy and.
And managing their own working capital that you just gave him the green light go ahead and build inventory and I know there was some surprise there because you haven't done that before but how has that worked out is that going to be a permanent.
Where is that of a 1 time of that just you needed to get in front of this demand, but just some color there would be helpful. Thank all of them and if the demand holds up then we'll continue to kind of given that latitude because of the absolute profit versus the carrying cost of the working capital.
The the math works I guess, the best way I can say it.
I would expect if we get improvement and the logistics supply chain that it will come down naturally because that's what's really driving and at the end of the day, we're basically.
Given the green light to everybody of you've got the backlog Don Madison of trying to get the sub components and because we want to convert.
That's real helpful. Thank you.
Thanks.
Thank you that concludes our question and answer per yet and Delaware at the second quarter 'twenty 'twenty..1 earnings conference call. You May now disconnect your lines at this time.
Great day.
Yeah.
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