Q2 2019 Earnings Call
Recalling the conferencing center and operator will be joining you momentarily.
Please be prepared to provide your conference I.D. number at any additional information required by the company hosting this conference call.
After all information has been gathered your line will either be placed on hold or join to the conference.
Thank you for your patience.
Please stay on the line for the next available operator.
Thank you for your patience.
Please stay on the line for the next available operator.
Thank you for your patience.
Please stay on the line for the next available operator.
May I have your conference I'd number.
For the quarter was two to five six years or so.
Your first and last name.
On their CEO and Uh huh.
Mcdaid and see the D.
And your company.
Errol A.I.E.R.L.
You are.
Hey.
Okay and your telephone number.
That you want to.
960.
306 five it.
Thank you I'll join you now.
As announced we completed the acquisition of all flow pump company growing manufacturer of specialty pumps. This acquisition strengthens our leading position in the growing segment of positive displacement pumps for critical fluid transfer applications.
Overall, we are encouraged by the results from the second quarter and the first half of 2019 demand remains constructive across much of the portfolio, our rightsizing and operational actions are yielding robust margin improvement.
Dover enters the second half of the solid order backlog augmented by recent customer wins and as well as strong momentum and execution towards margin targets. As a result, we are tightening the top half of our previous full year, adjusted EPS guidance range to $5 and 75 to $5 and 85.
Cents per share.
That's it for the opening comments I'll pass it to Brad and then come back with the segment color. Thanks Rich.
Let's let's move to slide four.
In oil revenue grew by 1%.
The 1.8 billion and was driven by strong demand in fluids in our industrial platform in engineered systems, GAAP EPS increased 25% to $1.35.
Moving to non-GAAP results as mentioned, we achieved significant margin accretion in the quarter with adjusted segment EBIT up 190 basis points over the prior year, reflecting continued execution of productivity initiatives, our SG actions announced last year, our for all intents complete.
And we are delivering the savings we expected.
Adjusted segment, EBITDA was $376 million a margin of 20.8%.
Key adjustments for non-GAAP results. This quarter were acquisition related amortization and Rightsizing and other expenses. The EPS increase was supported by two cents or $3.6 million of discrete tax benefits on par with a two cents benefit in the second quarter of the prior year.
Now moving to slide five.
Lets get into a little bit more detail on our revenue and bookings results in the quarter.
As mentioned in our summary, organic growth was solid at 2.9% driven by fluids and engineered systems, and partially offset by refrigeration and food equipment.
As you can see.
Foreign exchange rates negatively impacted our revenue and bookings FX FX was signal a significant.
2.5% or 45 million headwind for revenue.
Which had an 8 million impact on earnings with the most notable impact in engineered systems, largely driven by printing identification demand being levered to.
In EMEA and Asia.
The two largest contributors to the FX headwind, where Europe and China.
Where average exchange rates declined against the dollar by approximately 6%.
Based on current rates, we expect the impact to moderate in the second half of the year.
We have used a 1.13 rate for the euro and a 0.15 for the RMB and our full year forecasts.
From a segment perspective engineered systems grew $12 million or approximately 2% organically and fluids grew $52 million or 7%.
Refrigeration and food equipments revenue decreased by $11 million or 3%.
Bookings declined organically, 1.7% and as we've previously mentioned were also negatively impacted by FX.
In engineered systems organic bookings declined by $39 million or approximately 5.5%.
Due to slower activity in digital printing and the environmental solutions group.
Bookings in fluids increased by $52 million or 7% with strong order activity across the segment.
Bookings in refrigeration and food equipment declined $43 million.
Rich will provide more information on the order book and individual businesses in a few minutes.
Finally overall order.
Overall book to Bill finished at a solid 1.0, while backlog at the end of Q2 was 2% higher than this time last year, driven primarily by engineered systems.
From a geographic perspective, the us our largest market grew 2% organically driven by mid single digit growth in engineered systems and fluids, partially offset by refrigeration and food equipment.
Europe was up 8% with all segments, posting organic growth and a particularly strong quarter from fluids, which was up over 20% in EMEA.
All of Asia was down 5% organically with China down 1%, our fluids business was up mid single digits in Asia overall with double digit growth in China on the strength of both the retail fueling and process solutions businesses.
Whereas engineered systems and refrigeration, we're down in Asia.
Due to slower at.
Slower economic activity in the region.
Let's go to the earnings bridges on slide six.
Starting on the top.
Engineered systems adjusted segment, EBITDA improved 5 million, largely driven by volume and productivity initiatives more than offsetting headwinds from FX.
Fluids growth of $35 million reflects a combination of robust growth continued margin improvement in retail fueling and acquisitions.
The 7 million decline at refrigeration and food equipment reflects lower volumes for swept.
And slower activity in food retail.
Going to the bottom chart adjusted earnings from continuing operations improved $29 million or 15%.
Primarily driven by higher segment earnings and lower corporate costs, partially offset by slightly higher taxes.
Now on slide seven.
Year to date free cash flow was $142 million, which is an improvement over last year in absolute terms and as a percent of revenue.
The second quarter in particular compared favorable favorably at 8.5% of revenue versus 6% last year.
Year to date strong topline growth was supported by working capital investment of $164 million, which we expect to convert to cash in the back half of the year.
Inventory built with volume increases in the quarter as well as in anticipation of a strong Q3.
The third and fourth quarters are traditionally our strongest cash generating quarters.
Capital expenditures were $91 million year to date slightly below last year, we expect our cap capex to ramp up in the second half in line with the seasonality of our cash flows.
And are still on pace to execute our previously guided organic growth investments in the year.
Let me turn it back to rich.
Thanks, Brad let's move on to slide nine engineered systems delivered top line organic growth 1.7%.
Largely driven by the industrial flat platform has you can see in the bridge incremental margin conversion on organic growth was over 100% in the quarter driven by productivity gains and volume leverage. Despite the net negative FX translation adjusted segment margin increased 120 basis points.
Our printing and I'd platform declined organically by 3% driven by the expected slower activity in digital printing due to the eight month trade show that happens every four years or customers assess and review the latest technology before making investments to put that to put that impact and prospective digital printing was down approximately 20% in revenue at 50% and earnings from the comparable quarter in a business that we forecast to grow double digits in revenue for the full year.
We are encouraged by the pipeline of orders coming out of the trade show, especially in our large industrial printer line and expect the business to re accelerate into the second half overall the platform for felt performed well in Europe , while Asia experienced continued slowing from Q1.
Our industrial platform posted 5% organic growth our waste handling business continued to deliver double digit growth as demand remains strong for both traditional equipment and software.
The software growing by over 20% driven by significant ramp in installations.
Despite the difficult trading conditions in the general automotive space, our vehicle service business posted 2.4% growth.
Offsetting the more challenging trading conditions in automotive OEM demand negatively impacting to stack up.
MPG was down for the comparable quarter due to shipment timing, but exits Q2 with its highest order backlog in many years as demand conditions in the defense sector remain constructive.
Going into Q3 bookings for engineered systems remain solid most businesses posted book to bill of around one with a notable exception of our waste handling businesses, where orders were slower versus high comps and record backlog.
In the comparable quarter overall, we enter the second half on solid footing for for the segment largely driven by printing and I'd platform, which is accretive to consolidated margins.
Moving on to the next slide the fluids segment posted strong organic growth of 7.5% for the quarter with continued strength across all the businesses.
Adjusted segment margin increased 410 basis points with incremental organic margin conversion at 50% driven by volume leverage improved productivity and product mix.
Adjusted EBITDA margin increased to 22.9%.
Our pumps and process solution business had another excellent quarter posting organic growth of 7% demand remains robust for our industrial pumps.
Rotating equipment components for natural gas compression and renewable energy and equipment for polymer pumps and filtration systems.
Biopharma and third thermal management markets continued to deliver double digit growth during the quarter as we ready for a significant capacity expansion in this business.
Fueling and transport posted organic growth of 8% as demand remained robust across all geographies for both underground and above ground equipment systems and v. demand as forecasted continued to be choppy as all signs point to adoption trajectory continuing beyond the 2000 Teus beyond 2020 at current activity levels.
Margin conversion on volume was strong in the quarter and we expect that trend to continue for the balance of the year as we track towards meeting the stated margin objectives in the fueling solutions business.
Bookings in this segment grew 7% organically over the comparable period. The growth was broad based with particular strength in our plastics and polymer equipment and Biopharma businesses.
In refrigeration and food equipment organic revenue was down 2.8% adjusted EBIT margin of 15% demand for that margin accretive swept heat exchanger business was down 6% in the quarter, most notably in Asia.
Activity in food retail was mixed with systems and service projects posting a decline year over year, while our door case product line.
Food retails largest posted double digit growth in revenue and backlog as retailers restarted investing in store formats and refurbishment.
United Brands grew modestly despite a challenging comparison to the prior year as several large chain rollouts were shipped on orders booked last year.
And Belvac revenue increased modestly however bookings were slow.
The poor mix effect on margins driven by the reduction of heat exchanger and system shipments was further exasperated by volume ramp costs in retail refrigeration, which struggled with supply chain constraints and labor availability at our principal production site in Richmond.
While we are encouraged by the turnaround is demand and few food retail for our court case and door products. It is absolutely clear that we need to deliver on our automation project to deliver on volume earnings conversion.
Bookings in the second or slower this quarter, posting 10% organic decline, mainly due to lower return lower activity in refrigeration systems businesses, and can making equipment and food retail recent customer wins versus this time last year give us confidence about the improved revenue outlook for the second half.
Moving to slide 12.
Slide 12, disaggregate the key sources of EPS accretion for the quarter Dover continues to deliver on announced cost actions incremental margin for the quarter.
I was at 21%, 21% and is expected to be expected to be the lowest percentage conversion for the year as a result of the negative infant negative mix effect on the high margin printing and identification platform in this quarter.
Moving on we are reiterating our revenue guidance or fluids in engineering systems based on order books and forecasted growth in printing and I'd and have lowered refrigeration and food equipment. As we are cautious on Asia and systems demand in the second half overall, we are encouraged with the performance in the first half of the year organic growth is 5.5% with good margin conversion.
We are executing well on productivity and cost initiatives demand remains kunst supportive across most businesses, but visibility and sentiment remain cautious in some sectors.
Despite the cautious macro environment, we are in control of a significant portion of our year over year profit change and as such we are tightening on our full year guidance range to 575.
The $5.85 per share.
Lastly, as a note we are targeting mid September to host to Dover day in Chicago, where we will provide an update on our progress of previously announced initiatives and review of our portfolio strategy.
We will provide more information on that soon so thats the presentation, let's move on to Kevin.
Thank you the floor is now open for questions. If you would like to ask a question Press Star then the number one on your telephone keypad.
We do ask that you please limit yourself to one question and one follow up.
Your first question is from Jeffrey Sprague of vertical research partners.
Thank you good morning all.
Jeff.
Hi.
First on.
Kind of a product idea and printing businesses. Thanks for that color on kind of the it might affect but can you give us now a little bit of additional color. Then on one orders auto look like in Q3, do we see a big order bump there and not.
I just wonder if you could also then the conversation about that segment that kind of the Markem imaje piece of the business also okay sure.
If we were to normalize our revenue through the quarters, the effective printing of digital printing.
On the quarter was a little bit in excess of a half a point of organic growth.
So I mean, we knew this was coming.
Total corporate for the total corporation that is not just the segment.
Look we knew this was coming I can tell you that the feedback that we get in terms of.
Orders in the pipeline is very encouraging and I think that we are very conservative of how we recognize bookings in that particular segment, but we're talking about.
2 million euros.
Dollar pieces of equipment.
So we wait until we have letters of credits in place in a variety of other.
Things before we put them into backlog I would expect that we will book of a decent portion of that in Q3, but I can tell you that we have already begun to ship in Q3 in that particular sector. So we're that's why we're confident in terms of the both the margin impact.
On the segment in the second half.
As it relates to admire in total and by had a very good Q1, it was slightly slower in Q2.
Largely driven by Asia. They had another very good month and another good month or quarter in.
In Europe .
Our full year expectations is for growth to come back modestly in our mind, but margin accretion to be robust in the second half.
Hello.
Second question, if I could just on long duration.
So your comment about recent customer one sounds like it.
Comment not a refrigeration comment on just to clarify that.
No that's a refrigeration comment but go ahead.
Although that is a refrigeration comments loan.
Could you elaborate a little bit on that and I guess.
The comment about struggling with the volume ramp up right here.
Your orders don't suggest there is a strong.
Volume ramp up obviously year end kind of a seasonal period is.
Is that what you're suggesting just kind of normal seasonality there is a little bit of struggle or there's something wrong look I think the way where you what we have as of.
We have to separate.
The segment into its component parts right. So, let's let's put 80 heat exchangers to the side for a moment.
What we're saying is on the systems business of refrigeration. That's been slow so that is disproportionate amount of the decline in the bookings the bookings on case and door on the other hand are up significantly and our production has ramped up significantly and case and door.
Unfortunately during the quarter that is because of the labor intensity or that product line a significant volume ramp comes at some cost.
That quite frankly, we struggled with coupled with that that we add a supplier that went belly up in the middle of the transition so.
I think overall it cost us approximately four to 5 million bucks in the quarter.
Kind of lets call that frictional costs with the ramp up.
We'll do better going forward from here, but at the end of the day I think that we're we're pleased with our ability to compete in the marketplace. We're pleased that.
The order volume.
Is ramping in door in case, so retail refrigeration is actually moving up right now, but it's absolutely clear in order to change the profitability aspect of this business, we've got to get this automation complete so.
Were kind of keeping two balls in the air where we're gaining market share and door in case, we like the way the business is moving.
It's it's going to come at some cost. So we don't have a lot of.
Significant margin accretion associated with that we'll get some absolute profit increase on the volume, but the margin accretion I think until we change how we run this business in terms of skew management and commonality of component parts, that's really what's going to trigger.
Great. Thanks, I'll leave it there okay.
Thank you. Your next question is from Steve Tusa of Jpmorgan.
Hey, guys. Good morning, good morning.
Good execution on kind of an uncertain environment.
On the product I'd side, you mentioned that bookings were down in Asia are you seeing.
Anything in kind of the machine builder channel that that is.
A bit more choppy than expected.
Given that there is a lot of cross border kind of activity for those guys, a small machine builders and in the us and Europe that are kind of selling into their that your products may kind of go along the same line with.
You know, Steve I don't know.
That question I'd have to go back to the guys and they didn't we'd have to see the segmentation of the individual markets that they sell into okay. I just think that overall.
Well Thats really digital printing issue in Asia for for that segment or was that seem to be more of a core a comment on kind of core EMI into Asia, it's more of a core ally into Asia on the digital printing side.
In our particular space, which is at the top end of the market the demand.
It looks very proactive for the next several years just in terms of the proportionality of versus ticket price of those machines I think thats, a timing issue and as I mentioned before that's a business that we expect to grow revenues by double digits for the full year.
So that side were.
Confident on as long as we can.
Get the letters of credits and everything all lined up based on what we think that the backlog is going to be on the semi side. It was a little bit choppy. So I don't think that I think that China was down.
1% and I think the India was down a couple of percentage points during during the quarter.
I think that that is a reflection of kind of what's going on in China, but I don't have any real color on the segmentation of their customers of EMEA and China I would have to get that okay. No. No problem you have your your plenty busy so don't don't worry about it.
On on the price cost.
The refrigeration business, which I would've thought needed to get a little more price to kind of offset any kind of material inflation or tariff kind of ambacs you didnt get price in that segment with that kind of where you probably saw the biggest.
Headwind from from price cost or do you not really have a headwind from price cost this quarter.
I.
I'd have to go would decide to aggregate it but I think on retail refrigeration, it's probably neutral not counting the frictional costs because that's not that's that's cost self inflicted quite frankly, yes. So I think we were probably neutral in retail refrigeration I'd have to go take a look.
At the other segments swept so different difficult one because it's it's it's euro basis, but it's got a lot of China exposure. So we'd have to go get that sorted out.
All right. Thanks translation, sorry to give you a long to do list that thanks, a lot better enterprise.
Thank you. Your next question is from Andrew Obin of Bank of America.
Yes, good morning, good morning.
Just a question on free cash flow.
Hi, Thank you gave a fairly wide target for the year.
Eight to 12 first time, you seem to be running well ahead of last year.
So where do you think you guys going to come out within that range.
Given the performance year to date and other than Capex, and you sort of big movements in working capital in the second half that we should be aware well I mean, I think that the working capital seasonality should hold.
Okay. So that's that's first and foremost around our target is to hit spot on in the middle of the range, which is exactly we did last year, we are running a little bit behind in capex versus our full year guidance. So I think that we're tracking probably to the lower end of the range on capex for the full year, but look that swing number.
Versus the tie of the entire working capital changes, but something but I don't think it's anything overall at the end of the day is what we said before we can we are working on grinding down working capital as a percentage of revenue or are increasing turns across the portfolio.
But what's really going to swing it for us at the end of the day is what the second half growth rate looks like if we re accelerate in the second half of the year.
Then the industrial inventory won't come down if we if we don't then we would expect the same kind of liquidate liquidating or liquidation profile that we showed you last year in Q4.
And just a follow up question on operations Jeff.
Inefficiency at refrigeration and food equipment on ramp up any of it.
Relating to restructuring and operational changes.
That you guys are making and just if you can sort of provide us broader color you know youve sort of now been at Dover for a while.
How do you feel about the runway for cost take out going forward and ability to execute on I. Appreciate that you have not provided.
Any specific targets for next year, but just give us a broader update thank you sure.
The margin target that we gave for.
Retail refrigeration last September holds.
That requires us to intervene on the production footprint and as Weve said before.
That process is underway, but this is not just basically installing some equipment and that changes the business. The business is working on a fundamental change.
Of how they run the business, particularly as it relates to skew management commonality of components in a variety of other things, which allows for automation in the future.
You know I think that when we announced the investment they were going to make we said, what's kind of going to be a little bit of a chicken and egg because at the time, we are at the bottom of the market in terms of.
Of the demand function for door in case, and now that market is coming back and we're going to have to run the business and its more traditional labor intensive way until we get everything stood up but we need to protect market share and we need to protect the amount of volume that we've got going into fundamentally changing the business. So.
You know at the end of the day I'm, not making excuses for it I think that we you know we struggled with with getting the available labor in the market with unemployment rates of what they are it's tough.
And as I mentioned, we had a supplier kind of go belly up on us in the middle or the beginning of the quarter, which cost us some money. So I would expect that we improve over our performance in Q2, but really what's fundamentally going to change this business is changing.
Basically how we manage our skews and how much labor content is in this process.
Thanks.
Yes.
Thank you. Your next question is from John and Jeff Gordon Haskett.
Good morning, everybody.
Rick and Brad if you were to sort of we've talked about about Asia and parts it's selective.
Implications of.
Detraction, how much would you say Asia detracted overall from the results maybe you could look at it sequentially or however, you'd like to characterize its obviously not a big company in Asia, but it's still helpful. I think to put that into a kind of a jumbled buckets.
Well I think that.
Look I think that Brad mentioned in his comments with total translation impact was others Theres. The FX component of Asia, which you can calculate right. So it's a percentage piece based on the geographic distribution out of the seven to 8 million Bucks of translation loss that we incurred in the quarter. So that's a piece.
And then I think the quarter over quarter profit of Am I right.
Is Asia driven mostly.
Right, but I know that you can't see EMI at the end of the day, but you need to unpack it from from the digital printing impact, but I gave you some color in terms of what that right. And then you then you have the offsets from retail fueling having a really good quarter right in and continuing to have a good quarter in China. So.
If you put all that together.
Having the exact date in front of me I would say China down slightly on the revs blood earnings still remains positive for US, Yes, I mean swept was for Epicel.
Somewhere with somewhere between four and 8 million probably in the quarter.
Okay. No that's helpful. Rich at EPG, you alluded to the fact that you thought.
Dover might be perhaps one of the very few companies to benefit from these lift three tariffs.
Could you see any way you could expand a little bit on that but I got a few questions on that where exactly would that be benefiting you and.
Do you think it's sustainable at some market share opportunity like how how exactly that playing out.
Well I mean, I think that it's benefited benefit just because of of our participation in the markets.
With our critical components that are priced cost versus tariffs has been positive number one.
Number two you can read in the paper every day about people readdressing their supply chains and we are the beneficiary of that just because we are a component supplier that is levered.
Largely to North American production.
Conversely at the end of the day I'm not I don't want to take it. This is a crime like I'm positive on tariffs I think that it's just been we've been positioned appropriately just because of the nature of our business, so far but to the extent that those terrorists cause a significant slowdown in Asia than as you can see from the results that we have here than it ultimately it becomes a little bit of a negative negative on our revenue streams in Asia, but on the North American side of the business that had been positive both from a price realization point of view and a volume point of view.
Maybe just lastly, fluids, obviously put up another very strong broad based quarter I guess, we can sort of think about things like biopharma doing well.
On a sustained basis, but maybe you could just talk to your conviction in the portfolio, which I realize is got some niche elements to it the portfolio overall in fluid being able to kind of ex compares still put up a cadence of.
Robust growth against the backdrop of a global softening how are we how should we think about this do you think.
Look I mean that it is a collection of businesses and there's a variety of things going on right. We've got a high growth business that sitting in.
With Biopharma, that's that's growing in high teens lets call it and it has been for some period of time, So you've got a high grade at high margin. So you've got that portion of the portfolio. We think that we have a a pumps franchise that is able to compete both on macro growth and from a competitive point of view. So there is an element of share gain despite the fact that those.
Trying to calculate share gain in a very dispersed business is difficult. We believe that we're winning in the marketplace and that particular side.
And on the on the fluid side of the business, we've got a best in class.
Underground franchise that is driven by regular court regulatory growth and I would say that we're probably gaining market share. There also and most importantly, as we highlighted last year I think that our.
Above ground.
Business improved margins comparable margins by 400 basis points quarter to quarter. So basically we are on track to meet.
What we said by exit this year, so you've got.
In our high growth element and then you've got some nichey franchises that are winning in the marketplace and you've got one big piece of the business that it's improving march their margins dramatically.
And is there a runway of deals to do in this space rich that would meet your returns criteria and.
Pricing and so forth I hope so.
And we'll hear more in September thank you very much appreciated.
Thank you. Your next question is from Andrew Kaplowitz of Citi.
Rick you mentioned that EPG that DSS would probably only reached the bottom of the 15% to 17% margin range for the year, but you just can't answer John's question and you kind of said that do you have that now seems on track, obviously, a very strong incremental than the quarter did something change is it just that they're just trying to get their act together and you didnt better all year, but.
You Didnt make those comments in DPG.
Yes look I am not I think that the range that we have for eggs is 15 to 17.
I said, we are tracking towards the bottom can we beat it sherbet Ken.
But let's let's walk through another quarter, or so and see where we are but I think that.
We're not out of the woods from a comp point of view before we get excited about the margin comparison, but I think the team is on it.
And clearly.
400 basis point accretion in the comparable quarter is great.
And it puts us on the trajectory to meet those exit numbers.
The backlog is there so at supportive.
You know at the end of the day that is it to me that is a mid term target for that particular business because even at exit.
When we compete against the competition, we've got some room to go but so far so good and we're very pleased with the effort of of that particular business to grind it out.
That's great and then last quarter rich in ESG. In particular, you mentioned that you had decent visibility into the business in Q3, but you need to get another quarter under your belt can see how that business is one example of the year. So how are you thinking about DST bookings and revenue growth in particular for the second half of the year and what kind of visibility do you have at this point.
Mhm.
And look we feel good about SG for the year. So I think clearly that when we're looking for that business has slowed down we don't think its going to this year were booked pretty much.
Through the end of Q3, we're waiting on a few orders and backlog. So hopefully by the time, we do this again in another 90 days that the backlog will actually.
It's probably stay even to go up slightly which would solidify the full year were very pleased with the growth that we're getting out of the software franchise. So weve noted that.
That particular piece of the business has grown 20% and its not margin accretive yet because it's just on installs.
But we expect the leverage on that to be significant going into 2020.
Thanks, guys.
Thanks.
Thank you. Your next question is from Julian Mitchell of Barclays.
Hi, good morning.
Maybe a first question around.
Capital deployment.
There was no buyback spend in the first six months of the year.
A couple of small acquisitions and you closed on a little slow palm.
So maybe give us some update on.
At least for this year, specifically, how you're thinking about capital deployment I understand we'll hear about the medium term in eight weeks time.
Well I mean in general terms Julien we.
It's basically what we said before around our bias is for.
Organic investment followed by inorganic investment.
Go into capital return I think that we've got a relatively robust pipeline on the inorganic side.
So, we'll keep our powder dry to see how that.
Develops over the next few months.
If we are unable to close on those then we'll revisit the issue of capital return for sure.
I see so if we don't see a big step up in M&A, we can expect more buybacks by year end at some point I don't want to put a calendar on it but at some point, we're not going to.
We have an expectation of terms of of cash flow for the year, we're not going to sit on a significant pile of cash at negative carry for sure.
We prefer to deploy it.
Understood. Thank you and then my follow up would be just looking at the aggregate profitability in refrigeration and food equipment.
Should we expect the profits in that division to be flattish year on year for 2019 as a whole or is the is that just dependent on the Richmond.
Site productivity efforts, our expectation is for revenues and profits to be up year over year.
Perfect. Thank you.
Thank you. Your next question is from Nigel Coe of Wolfe Research.
Thanks, Good morning.
We've we've touched on already but.
I do want to pick up on that on the last question from Julien.
The growth in filtration in foods.
We've got Mike down organic in the first half of the year backlog is pretty flat, we burned backlog in Twoq you modestly.
What is the degree of conviction in the second half.
Moving to sort of a threefold thing organic growth rate.
Well I mean looking at the end of the day I think we moved the segment down by one point.
Okay, I think that our conviction in food retail for growth is quite high.
We actually missed.
From a calendarization point of view in order that we would have liked to have been able to book at the at the end of June but.
Can't book It until you have the order at the end as a sell ins coming in now so I get to just to give you some color on bookings as we proceed into into Q3, we're quite constructive there.
It's for US it's the margin conversion issue in that particular segment, we've got some aspirations there.
But as we said before I think that we need to change the dynamic of that business in terms of working on skew management and reducing the amount of labor content, but that the benefits of that.
Don't come in until mid Twentys.
So I think that overall, we're pleased.
In terms of the demand.
Dynamic for door in case, what's going on in the marketplace, it's up to us to try to maximize profitability out of it in the second half of the year.
Thanks, Rich escrow Thats, great color and then.
Maybe just characterize what you are hearing from kind of your your field organization.
Your channel partners and third the question maybe is that some of the distributors in the U.S. I mean from a change in customer behavior.
Through June .
Towards the end of last quarter and you alluded to.
Kind of lower end of the Capex for the full year and I'm wondering if maybe you put them back a little bit so dialing back little bits on investment spend in the back half of the year I think that was more back end loaded in your plans and any color on that would be great.
Let me I'll start with the second I'd go back to the first I think you know we're not pulling back on Capex. It's just.
As it always happens Youve got aspirations to set spend this money and then it takes time to actually deploy it because they think about.
What we're doing with our new plant up in.
Minneapolis for CPC and now by the time, we worked through getting building permits in a variety of other things. We're three months behind and then timing. So I think that that capital will be deployed overall, but I think it's probably a piece of it is going to slip into 20, just because of capital timing at the end of the day. So we're not pulling back and then the aspirations, but then again, we did give a range and we're probably going to come out at the bottom of it now the way things look from a calendarization when it.
Well with the amount with the different types of businesses that we have in the portfolio you can imagine the.
Plethora of mixed messaging that we get from the marketplace I can just tell you as a general comment.
That.
The sentiment was more negative at the beginning of the quarter. So than it was at the end of the quarter. We actually went through this issue that that.
Back in.
April that we were kind of.
Worried a little bit about backlogs in a variety of other things and then we actually accelerated in the quarter in terms of both our own shipment performance and our backlog so.
It's a little bit of an odd situation thats going on out there in terms of what we're hearing from the marketplace and how thats developed into kind of our forecasting I can just tell you that leaving.
The quarter and based on a what's in our control and what we need to do to convert to get to the top end of the range. If you look down at the squeeze.
I think that we're in good shape.
That's right, that's a very old environment, well I think the kind of average and good luck. Thanks. Thanks.
Thank you. Your next question is from Scott Davis of millions research.
Hi, Good morning, guys, Hey, Scott.
Hi.
I can't remember if you mentioned this at EPG or not but what were the return hurdles that.
You crossed for this all flow pump is it double digit by year, four or something like that if it were to Scott mentioned that yet it's 10 by year three.
Ken by year three okay.
And then I have a question.
Covered your stock for a while and I don't know the answer to this the environmental solutions business you mentioned.
Software sales and I just can't recall, what that is can you.
Our emerging overlaid on acquisition a couple of years ago called third eye that debt was principally therefore doing driver safety.
But it is managed now to expand.
What it sells around that camera technology that is quite interesting and the adoption rate over the last six months at some major independent carrier has been excellent.
Is that a is that a I mean can you size that business is it big enough to move the needle.
Hope so in the future I can just tell you that off a relatively.
Let me think about it in the context of the ESG.
Yeah, I mean, it's big enough to move the meat needle overtime.
Okay.
And then just last question just on portfolio and imagine will get into this at Dover day in mid September but.
Are you reasonably happy with the portfolio you have.
Now Richmond, I know, you've got some challenges in for duration, but as this.
If we look out five years from five years two years from now is there likely to be further divestitures.
Well I don't want to get ahead of our big presentation in September nothing in the portfolio is destroying capital at its present, but five years from now as the portfolio going to look different than it is today the answer is yes.
Okay.
All right, we will see in September thanks, guys.
Scott.
Thank you. Your next question comes from Mig Dobre of Baird.
Yes, thanks, good morning.
Just I want to go back to your comments from about two minutes ago on just trends through the quarter.
I mean I understand your comments on on Asia and.
Maybe portions of the business and they're being a little bit weaker but it seems to me that everything else is trending pretty well. So I guess you know against that.
Theme, if you would of macroeconomic uncertainty can you.
Kind of help us understand if there is anything that flowed maybe through the quarter, where was that and if things may be held better than what you anticipated at a point in time in April for instance.
Where did you get a little bit of upside.
Well I think in the tire fluids segment is performing.
Slightly better than we would have expected I think on the top line and I think that that we're pleased with the trajectory of the earnings for sure.
We would have we did not expect.
The slowdown in heat exchangers demand during the second quarter, nor did we expect the FX so between those two.
That probably cost us $7 million to $8 million in profit during the quarter. So those were unexpected theres certain portions of the portfolio.
Like the small exposure that we have to automotive OEM that we expected to slow and it did in fact slow during the quarter, but that.
We had modeled into our full year forecasts at the end of last year in the first buy sell.
You know I think that we would have not.
Forecasts, the frictional costs and Richmond due to the fact of labor unavailability in a supplier issue that we had.
DDP as weve beaten that to death, we expected that in the quarter. So thats not a surprise I think that the the heat exchanger business.
And the FX translation.
Is the two areas that when we take a look at what we had forecast that kind of the beginning of the quarter and versus the as a quarter, where we are we would have liked to do better a little bit on the.
On the backlog and as I mentioned before we are we had a couple.
Orders coming that we would have liked to get into June I can tell you. It just some further color on the DDP side and when we did that trade show and then if you go back and look at my comments I think that we're really pleased with the feedback that we have but we didn't book anything in Q2 and DDB. So to the extent that we can convert that interest into book into bookings in Q3, we would expect to see a good bounce back there.
Alright Thats helpful. And then maybe for my follow up I saw last night, you announced a partnership with IDB for Dover fueling so.
Maybe you can give us some thoughts here as to what the revenue model might be the growth opportunity. How do you see the retrofit of existing infrastructure.
What's the game plan.
Well look I can't I can't monetize it for right now because we just signed it yesterday, but in effect, we have always said that.
That we recognize the fact that that he the Chargers there was going to be somewhat of a future and that we can all debate with the size of that is but weve signed a Europe contract, where they be where we'd be purchasing chargers for resale into both our distribution and direct customer network and that we'd be moving to purchasing kits that would be incorporated into our dispenser factor over time and spare parts. So too early to start to say size and scale, but I think it was important that we develop partnerships because were very attractive.
Two manufacturers of charging stations because of the size and access that we have to to distribution network and our OEM customers.
Do you last question do you foresee having the need to make any sort of changes to the way you you operate or go to market or really anything in order to.
Be able to capture on this opportunity or is it just with your.
Install base for lack of a better term in terms of operation the latter.
All right. Thank you.
You're welcome.
Thank you. Your next question is from Joe Ritchie of Goldman Sachs.
Hi, Thanks, Good morning, guys.
Good morning, Joe.
Hey, maybe just touching on the on the Rightsizing benefits first second.
Obviously, you guys have executed well in that regard and and I think where you've had about a 30 had benefits so far this year.
It seems like we're probably going to be through most of it I guess, if we get into Threeq you and so as you kind of think about the composition of your guidance into the second half of the year. How are you thinking about the important.
Of getting a little bit better leverage out of your organic.
Volumes in order to take to hit your guidance I'm wondering.
Yes.
Got you and then we knew that was a question. If you go back and look at my comments I said that the margin conversion in Q2 is likely to be the lowest for Dover for the full year.
So if you go back and take a look at the side of the EPS impact of conversion, we would expect that conversion to go up in Q2 and in Q3 and Q4 four relative to Q2 and that the ASG M&A to slowly unwind.
But I think thats all baked into what we believe that we need to do.
To reach the top end of our EPS guidance. It sounds to me. So I'm sorry go ahead.
Which is rich is referring to the 21% on the chart you see to 73, there with SDMA, but 20 one's going to improve in the back half.
Got it and the biggest drivers of that if I'm, if I am hearing you guys correctly.
Why is it going to come in RF, any and then and then potentially with with that digital printing picking back up in units or are there other moving parts and while I think that we expect for.
Clearly for engineering systems, driven by printing and I'd portion of platform within engineering systems.
I think that we're going to continue to have very good conversion in.
Above ground fueling systems.
On the margin side, and then thirdly, it would be DFE R&D, which.
Even when we continue to make strides improving performance is going to be dilutive to consolidated margins.
Okay, Yes that makes sense and then maybe my quick quick follow up here I guess just to make sure I understand the impact that I can they had on the quarter. I think you guys had roughly 50 basis points of growth to the whole portfolio say call. It 100 to 150 on on the actual segment is the right way to think about it then.
Call. It QQ would've growth would have been more like 3% in the segment and maybe that's our starting point. It's my expectation is higher than we would have we would have rounded up Joe so I, but at the end of the day would have been three and a half or more or slightly in excess of three and a half to four to four outright I was talking specifically about an engineered system yeah right you're right. We're just thinking about okay, alright got it and that's kind of like the starting point for for Threeq, you and you guys would expect an improvement on that yet.
All right well that will be ignored that would be kind of like the normalized in a business. We expect to grow in excess of 10 for the full year.
Gotcha, Okay, I think I got it thank you.
Thank you. Our next question is from Deane Dray of RBC capital markets.
Thank you good morning, everyone Hi.
Hey, just wanted to follow up on that last comment on digital printing the idea here is.
Purchasing managers or out of pocket. So there was no ordering but when you're talking about normalizing did you launch any new products at the trade show that would create some incremental demand or is it the same product line and just to catch up on orders, but we did launch a product that many large deal and then we launched a couple different software solutions and a bundling package of consumable products with the big printers. So we've launched a series of different things but.
Even if we had not launched anything we would have had the same demand dynamic because that's just the way that the show only happens every four years. So everybody holds often do they see what's the latest launch products and what the pricing environment is in a variety of other things, but if I go back to what rich said the order take was very good at that show but were.
We're not showing them in our bookings until we get the credit lined up with our customer base you can imagine we ship those all over the globe and we're very conscious of being paid for what we ship. So we line that up first.
Got it and then just.
A clarification on heat exchangers that came up a number of times your size that I think you said 4 million, but what do you attribute the slow down or the falloff in demand was there any share loss is this trade trade uncertainty, but what would you point to there yes.
I'm always shy away of any of our businesses having.
A being a macro driver why I can tell you is that it was mostly China and it was mostly non reef non refrigeration product line HRG danese, non HQ nonviable HV AC product line, so industrial applications.
Got it thank you.
Thank you that concludes our question and answer period I would now like to turn the call back over to Mr. Gallagher for closing remarks.
Thank you. This concludes our conference call. We thank you for your interest in Dover and look forward to speaking to you next quarter.
Thank you that concludes today's second quarter 2019, Dover earnings Conference call. You may disconnect. Your lines at this time and have a wonderful day.
Okay.