Dover Corporation

Good morning and welcome to Dover's third quarter 2020 earnings conference call. Speaking today are Richard J. Tobin, President and Chief Executive Officer, Brad Serapak, Senior Vice President and Chief Financial Officer, and Andre Galiuk, Vice President of Corporate Development and Investor Relations. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key on your telephone keypad. As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Andre Galiuk. Please go ahead, sir.

Thank you, Laurie. Good morning, everyone, and thank you for joining our call. This call will be available for playback, and the audio portion of this call will be archived on our website for three months. Dover provides non-GAAP information and reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on our website. We want to remind everyone that our comments today may contain forward-looking statements that are subject to uncertainties and risks. including the impact of COVID-19 on the global economy and our customers, suppliers, employees, operations, business liquidity, and cash flow. We caution everyone to be guided in their analysis of Dover by referring to our Form 10-K and Form 10-Q for the third quarter for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law. With that, I will turn this call over to Rich.

Thanks, Andre. Let's begin with the summary results on page three. As we guided back in September, July-August trends were positive and we were exceeding our internal forecasts. This dynamic continued through September. In addition to the improving demand environment, we were very encouraged by our manufacturing operations and supply chain performance in the quarter. The solid operation execution had two tangible benefits in Q3. First, it increased our capacity to deliver higher volume than expected from the backlog in our long cycle businesses, and as you see, the positive impact to the top line. And second, through a combination of mixed and fixed cost absorption, it drove a robust margin performance for the quarter. Demand trends continue to improve sequentially across most of the portfolio. The trajectory continues to vary by market, and I'll talk more about that, but our diverse end market and geographic exposure is clearly an asset to us in the downturn. Revenue declined 5% organically, and bookings were flat, with a third of our operating companies posting positive year-over-year bookings for the quarter, and more than half posting positive comparable growth in the month of September. We're not out of the woods yet, but the trajectory is encouraging, and we continue to carry a healthy backlog going to the fourth quarter and into next year. We delivered strong margin performance in the quarter and year-to-date. We achieved margin improvement in the quarter despite lower revenue driven by our operational multi-year efficiency initiatives, gaining further traction, and by improved business mix, some of which we highlighted our recent investment day focused on the pumps and process solutions segment. and biopharma business in particular. With the strong results to date, we expected to overdeliver on our full-year conversion margin target and are now driving towards achieving a flat consolidated adjusted operating margin for the year. Cash flow in the quarter was strong at 17% of revenue and 127% of adjusted net earnings. Year-to-date, we have generated $117 million more in free cash flow over the comparable period to last year, owing to our robust conversion, management, and capital discipline. As a result of our performance in the first three quarters of the year and a solid order backlog, we are raising our annual adjusted EPS guidance to $5.45 per share, We are not in the clear on the macro backdrop and performance remains uneven between markets, but we believe that our performance to date and the levers we have in our possession will enable us to absorb any possible dislocations in the fourth quarter should they materialize. Let's move to slide four. General industrial capital spending remains subdued in Q3, resulting in a 10% organic decline. for an engineered products driven by softness and capex levered industrial automation, industrial winches, and waste handling. Additionally, our waste handling business had the largest quarter ever in the comparable period last year, making it a challenging benchmark. On the positive side, aerospace and defense grew double digits on shipments from a strong backlog, and we've seen robust recovery in our vehicle aftermarket business after a difficult couple of quarters. Productivity actions, cost actions, and favorable mix minimized margin erosion in the quarter, nearly offsetting the impact of materially lower volumes. And fueling solutions saw continued, albeit sequentially, slower growth in above-ground equipment in North America on EMV compliance and regulatory activity, whereas national oil companies in China continued to defer capital spending amidst ongoing uncertainty. Demand for below-ground equipment has improved sequentially as construction activity restarted but remained subdued globally. And in China, we're still weathering the roll-off of the double-wall replacement mandate. Margin performance in the segment was very good and a testament to the operational focus and capability of the management team and was achieved through productivity improvements, cost controls, and favorable regional mix more than offsetting volume under-absorption. Sales in imaging and identification declined 8% organically due to continued weakness in digital textile printing. We've seen improving demand for textile printing consumables. Reflecting recovering in printing volumes, however, has been insufficient to prompt fabric printers to invest in new machinery. We expect conditions to remain challenged for the balance of the year. Marking and coding was flat on strong demand for consumables and overall healthy activity in the U.S. and Asia despite lingering difficulties with customer site access and service delivery. Despite segment margins being down relative to the comparable quarter driven by digital printing volume and fixed cost absorption, margin improved in marketing coding on flat revenue as a result of the mix of effect on consumables and operational initiatives undertaken in prior periods, which also provide a solid base for incremental margins in 2021 as textiles recover. Pumps and process solutions continued to demonstrate the resilience of its product portfolio, some of which we highlighted last month's Analyst and Investor Day. Strong growth continued in biopharma, medical, and hygienic applications. Plastics and polymers shipped several large orders from its backlog, which were initially slated to ship in Q4, getting it to a slightly positive revenue performance year-to-date. Compression components and aftermarket continue to be slow and weaker activity in U.S. upstream and midstream. Industrial pumps activity remained below last year's volumes, but has improved sequentially. This was another quarter of exemplary margin performance in the segment, with more than 300 basis points of margin expansion driven by broad-based productivity efforts, cost-controlled and impacted businesses, favorable mix in pricing, which more than offset lower volume in some of the portfolio. Refrigeration and food equipment posted its first quarterly organic growth since early 2019, which is a welcome sign in line with what we saw exiting the second quarter. Moreover, the recovery was broad-based. Our food retail business, the largest in the segment, grew organically and restarted remodeling activity in supermarkets. Belvac, our can-making business, began shipping against its record backlog, which we believe is in the early innings of a secular growth trend. Heat exchanges were approximately flat with continued weakness in HVAC offset by strength in residential and industrial applications, including semiconductor server and medical cooling. Commercial food service improved, but margins remain impacted due to continued weakness in institutional demand from schools and similar venues, while activity in large chains has slowly recovered. Cost actions taken earlier this year, as well as improved efficiency and volume, more than offset the demand headwinds in food equipment, resulting in appreciable margin accretion. We expect to continue delivering improved comparable profits in this segment in line with our longer-term turnaround plan.