Good morning, and welcome to Dover's 4th Quarter 2018 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 speakers' remarks, there will be a question and answer 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 Galiut. Mr. Galiut, please go ahead, sir.
Thank you, Maria. Good morning, and welcome to Dover's 4th quarter and full year 2018 earnings call. We'll begin with comments from Rich and Brad, and we'll then open the call for questions. This call will be available for playback through February 19, and the audio portion of this call will be archived on our website for 3 months. The replay telephone number is 800-585-8367.
When accessing the playback, you will need to supply the following access code, 6,883,448. Dover provides non GAAP information such as adjusted EPS results and guidance. Reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on our website, dovercorporation.com. Our comments today may contain forward looking statements that are inherently subject to uncertainties. We caution everyone to be guided in their analysis of Dover by referring to our Form 10 ks for a list of factors that could cause our results to differ from those anticipated in any forward looking statement.
Also, we undertake no obligation to publicly update or revise any forward looking statements except as required by law. With that, I'd like to turn this call over to Rich.
Thanks, Andre, and good morning, everyone, from Balmy Chicago. Let's get started on Slide 3. Q4 organic revenue growth was up 6.2% for the quarter, Solid demand trends in Engineering Systems and an exceptionally strong performance in our Fluids segment more than offset the continued weak demand environment in refrigeration of food equipment, particularly in can making equipment and food retail. Adjusted Q4 earnings were up 17% driven by top line growth, volume leverage and cost actions initiated in Q3. Adjusted EPS at $1.43 per share was up 25%, inclusive of $0.08 of favorable impact from tax.
As we discussed at the end of Q3, we had some heavy lifting to do to offset the Q4 forecasted trading environment in Refrigeration and Food Equipment. The organization made a determinant effort to convert its backlogs, crystallize its cost saving targets and focus on cash conversion with good effect. Despite the excellent shipping performance through Q4 in many of our businesses, bookings remained solid at the end of the quarter, posting a book to bill ratio above 1, which were broad based across the portfolio. Our SG and A rightsizing initiative is largely complete. And during the quarter, we began the first projects of our footprint rationalization plan, particularly with the 3:one production site rationalization in Unified Brands, which is underway.
In Q4, we have taken our initial restructuring charge of $5,000,000 as a result of the announced consolidation efforts, which we forecast to deliver $4,000,000 into 2019 and annualized run rate savings of $18,000,000 Finally, on the inorganic growth front, last Friday, we completed the acquisition of Bellinger, a leading car wash equipment manufacturer, which we announced earlier in the month. Bellinger meets all of the criteria for inorganic investment in terms of market attractiveness, execution profile and return on invested capital that we had laid out at our Analyst Day in September. It's been a busy quarter for the company, and I'm pleased that we're able to deliver solid top line growth and generate significant cash flow from operations while concurrently delivering on our productivity initiatives announced in September.
Okay, that's the balance of
the opening comments. From here, I'll pass it on to Brad.
Thanks, Rich. Good morning, everyone. Let's go through the details starting on Slide 4. As mentioned, our results for the quarter were driven by strong demand in Engineered Systems and Fluids, solid margin conversion on revenue growth and cost actions. Adjusted segment EBIT increased 9% to $285,000,000 and adjusted margin was 15.7%, an increase of 80 basis points.
This performance reflected strong growth in conversion and engineered systems and improved performance in fluids, partially offset by lower volume in Refrigeration and Food Equipment. Adjusted segment EBITDA was $352,000,000 Adjusted earnings were $211,000,000 in the quarter and adjusted diluted EPS was $1.43 an increase of 25% over last year. The EPS increase was supported by share repurchases and a lower tax rate. Full year 2018 results followed the same narrative as the 4th quarter. Results were largely driven by strong growth across our Engineered Systems and Fluid segments, partially offset by lower volume within our Refrigeration and Food Equipment segment.
Adjusted full year 2018 segment EBIT increased 4% to just over $1,000,000,000 Adjusted EBIT margin was 14.8%, an increase of 30 basis points, driven by stronger conversion on revenue growth and by the impact of our margin improvement plan. The effective tax rate for the full year was 21.4% when normalized for discrete tax benefits, excluding the additional Tax Act regulatory guidance covered by SAB 118. Now turning to Slide 5. Let's get into a little bit more detail on revenue and bookings results in the quarter. 4th quarter revenue grew by 3.2 percent to 1 $800,000,000 Organic growth in the quarter was 6.2% despite headwinds in Refrigeration and Food Equipment.
The impact from FX and dispositions added headwinds of about 2% and 1%, respectively. From a segment perspective, Engineered Systems grew $30,000,000 or 4.3 percent organically and Fluids grew $118,000,000 or 17.2 percent organically on broad based activity across the segments. Delayed shipments in key shaping equipment and weak retail refrigeration markets drove a $39,000,000 or 10.2 percent organic decline in Refrigeration and Food Equipment's revenue, the majority of which is due to the expected year over year declines at Belvac. In the Q4, our retail refrigerating business posted its lowest rate of revenue decline in 2018 at approximately 3%. Bookings increased 8% overall.
Organic growth was strong at 10%, contributing to an increase in backlog over both over the Q3 of 2018 and the Q4 of 2017. Of note, Engineered Systems and Fluids organic bookings grew $86,000,000 $54,000,000 respectively, reflecting broad based market demand. Refrigeration and Food Equipment segment bookings grew $25,000,000 organically on approved orders at retail refrigeration and exceeded revenue by $14,000,000 in the quarter. From a geographic perspective, the U. S, our largest market, grew 6% organically, where broad based growth in engineered systems and fluids was partially offset by retail refrigeration, which is primarily a domestic business.
Europe was up 10% organically with strong performance across all segments, and Asia was flat. Within Asia, China grew 6% organically, driven by strong growth in our Fluids segment. Finally, book to bill finished at 1.02, reflecting strong orders across our segments, including Refrigeration and Food Equipment.
Let's go to
the earnings bridge now on Slide 6. Starting on the top. Engineered Systems adjusted segment EBITDA improved $11,000,000 largely driven by solid conversion on broad based revenue growth across the segment, more than offsetting headwinds from FX and dispositions. Fluids EBITDA growth of $32,000,000 reflects a combination of robust growth, better execution in retail fueling, as well as strong conversion on volume and other businesses. The $22,000,000 decline in Refrigeration and Food Equipment reflects lower volume and negative business mix, particularly in our can making and retail refrigeration businesses.
Additionally, our margin improvement plan began to deliver results with our SG and A initiative contributing $22,000,000 of savings to Q4 results. Going to the bottom of the chart. Adjusted earnings from continuing operations improved $31,000,000 or 17%, primarily driven by higher segment earnings, lower interest and corporate costs, partially offset by higher taxes on increased earnings. Now on Slide 7. Free cash flow for the quarter was seasonally strong, posting our highest quarterly cash flow for the year despite the strong revenue impact resulting in higher year end receivables.
The 4th quarter is traditionally our highest cash flow quarter. Free cash flow for the year was $618,000,000 or 8.8 percent of revenue within our guidance from our Analyst Day in September. Cash cost of $52,000,000 associated with our restructuring initiatives negatively impacted cash flow in the year. Excluding such nonrecurring cash outlays, free cash flow was 9.6 percent of revenue. Now let me turn it back to Rich.
Okay. Thanks, Brad. Let's go on to Slide 9. Engineering Systems had a solid broad based quarter with top line organic growth of 4.3%. Incremental margin conversion in the quarter was excellent, driven by favorable mix and cost actions largely in the printing and ID platform despite a more modest top line growth rate in Q4.
The industrial platform performed well across the board as our CapEx levered businesses continue to operate in a constructive demand environment and all posting top line comparable revenue increases. Our ESG business continued to deliver strong results with a robust positive bookings trend building a runway to a solid forecasted performance for 2019. OKI, Distaco and TWG all finished the year contributing solid single digit growth and margin expansion, and microwave products delivered as expected in a robust military spending environment. Going into 2019, bookings for engineering systems remain solid. Expect the segment to contribute positively to both the top and bottom line despite the forecasted FX headwinds on our businesses that are materially exposed to Europe, predominantly Mark and Mommage, digital printing and VSG.
The Fluids segment posted organic growth of 17% for the quarter with the majority of the portfolio posting double digit comparable growth rates. Incremental margin was solid for the quarter as volume leverage and cost controls were able to offset the impact of unfavorable product and geographic mix. Our pumps and process solution businesses had an excellent quarter with incremental margin performance in mag, hydro and precision components in excess of 35% in the period as a result of volume leverage, mix pricing and cost control initiatives outweighing input cost headwinds and tariff costs on imported components. Fueling and transport posted exceptional top line performance for the quarter as demand remained robust and we were able to clear the backlog that had been built as a result of our facility consolidations in DFS and OPW. Margin conversion, while improving sequentially, is the largest opportunity performance improvement going into 2019, and we are targeting to progressively track to the margin objectives that we laid out in September through the year.
Refrigeration and Food Equipment revenue declined in the 4th quarter with the segment organic revenue down 10%. We had expected another difficult quarter at Belvac and in retail refrigeration and results came in line with forecasts. Margin performance in the quarter was negatively impacted by volume and refrigeration and mix at Belvac. The segment also incurred transitory costs associated with product rationalization programs and refrigeration in preparation for our automation efforts to be built out in 2019. Positively, retail refrigeration bookings were up for the first time in 6 quarters during the period as project activity has increased.
As we presented in September, we've begun in earnest to address our footprint and productivity actions by starting in our unified brands business as it is the clearest path to improving margins in the segment. We are planning we are in the planning and preparation phase for our automation and production consolidation programs in refrigeration and have committed 2019 capital spending to fund these projects. We are cautiously optimistic for improved revenue performance in 2019 for the segment based on our initial 2019 order backlog in retail refrigeration and quoting activity as you'll see in our full year guidance. So let's move on to the guidance. Our full year guidance is made up of the following: 2% to 4% organic revenue growth 2% to 3% total revenue growth positively impacted by acquisitions of 1% offset by foreign exchange of 2%.
We expect the FX impact to be concentrated in the first half of the year. You can see the tax rate. I'm going to deal with CapEx on the following slide. The range on free cash flow conversion reflects the announced restructuring programs that there's a backup slide on and adjusted EPS, EPS guidance of $5.65 to $5.85 Guidance does not include unannounced footprint actions to be taken in 2019. So let's go and take a look at the EPS bridge on the following slide.
As a starting point, the 2018 EPS is normalized for our full year discrete tax items that you can see at the far left. Contributions to the 2019 EPS guidance are as follows: $0.39 from incremental SG and A rightsizing carried into 2019 as well as the impact of announced footprint actions. We have included supplemental slides in the backup for you to take a look at. $0.08 per share from the Bollinger acquisition, which we closed January 25, dollars 0.19 to $0.39 of conversion of the revenue range and $0.15 from tax rate as well which is a negative as well as the share count reduction from 2018 repurchase program. It does not include any 2019 share repurchases leaving us to the EPS guidance.
The last slide is moving on to capital expenditure. CapEx is forecasted to increase in 2019 approximately 30% to 40% driven by several significant projects, dollars 26,000,000 greenfield plant to support the growth of our Colder Connector business, which had an outstanding year and is a business that we have targeted for investment. The plant will become fully operational in 2020. An initial $15,000,000 investment in automation in retail refrigeration to improve productivity and enable footprint consolidation, which is scheduled to come online progressively in the second half. Excluding these large structural investments, CapEx is in line with historical averages between 2% and 2.5% of revenue despite significant investment in our digital initiatives.
To wrap up, Dover enters 2019 solid momentum is represented by our Q4 organic growth rate, solid order backlogs across most of the portfolio and margin expansion potential driven by volume and cost initiatives. We are delivering on our September commitments for cost alignment and reinvestment in the growth platforms, which have been included in the supplemental schedules. We believe we are well positioned to deliver solid top line growth and strong double digit EPS accretion in 2019. Our guidance reflects a constructive demand environment, continued focus on margin improvement and rightsizing programs as well as disciplined deployment of capital underscored by the recent acquisition of Blanchard. And that concludes the presentation, and we will open up for questions.
Andre.
Maria, we can open up the Q and A.
Thank you. The floor is now open for your questions. Our first question comes from the line of Steve Tusa of JPMorgan.
Hey, good morning.
Hi, Steve. Good morning, Steve.
Just curious, so CapEx going up quite a bit next year, yet you're still guiding to kind of 8% to 12% of sales and free cash flow. Can you I know there is some noise around restructuring this year and maybe obviously some working capital headwinds. So can you maybe just help us kind of bridge the gap there and the other moving parts outside of CapEx?
Sure. I think that what Brad covered, we gave a, let's call it, a normalized cash flow for the cash impact of the restructuring operations. So I mean, we're just under 10% for the year. And with the strong revenue growth in Q4, we had some amount of cash flow that was hung up in receivables. So if you take a look at next year, the revenue growth is not at that same kind of momentum.
So we would unwind that Q4 revenue through cash flow. And quite frankly, it's not as if we're up we're performing at 100% in terms of cash conversion. So making up that $30,000,000 to $40,000,000 over the year, we've got the ability to do it. So I don't think it's I know that we're forecasting to spend more for CapEx. We believe in the projects we're doing it, but we don't think that, that spend on CapEx is negatively going to impact the cash flow target for 2019.
Okay. And then just quickly on Product ID. I'm not sure if you mentioned this in the prepared comments, but how are orders there in the Q4? And then there was a kind of a smaller cap here that talked about some weakness in digital printing. I know you guys digital printing is not a it may be not comparable across the board.
Are you guys seeing anything there with regards to trends globally and demand for what's been a pretty strong growth business?
Yes. I mean, look at digital printing in terms of its margin In printing and ID, it is
not so
much the market in the market.
In printing and ID is not so much the Market and the Manage piece. It's more just the lumpiness of the orders. But our expectation for digital print for 2019 is to increase revenue.
Okay. Maggie? I would just
add that Market Mammage has been steady all year long at above 1 book to bills. And so that business remains solid for us.
So I guess digital printing was the reason for kind of the weaker orders in the quarter. I think you said they were down?
Yes. Yes.
It's just the lumpiness of one time you get the Larios.
Yes, okay. All right. So that makes sense. Thanks a lot guys. Appreciate the detail.
Thanks. Our next question comes from the line of Nigel And it looks like Nigel withdrew his question. We'll move on to Andrew Ogan of Bank of America Merrill Lynch.
Hi, guys. Good morning. Hi, Andrew. Good morning. Just a question, just to clear it up, sort of unannounced footprint consolidation, I assume it's food refrigeration and automation actions related to it.
Can you expound on that? Can you just explain to us what that is?
Not necessarily. I mean, we are investing in retail, refrigeration and automation. That is going to progressively come online, so expand the capacity of the footprint in Richmond. So it's not alluding to that necessarily. I mean, that's a project that's going to take more or less the whole year to get online.
Okay. And that's all we have announced in terms of food refrigeration right now?
The only thing we've announced in terms of that segment is the consolidation in United Brands bringing the footprint from 3 to 1, which is underway.
Got you.
Got you. Okay. That makes sense. And then the second question, just going back to cash flow, this range of 8% to 12%, can you bracket what drives the range? And I remember at CNH, cash was a big focus when you came in.
How are you changing the systems inside Dover to achieve better cash flow in the long run?
Well, I
mean, Dover's historical cash generation has not been poor by any stretch of imagination. I think that what we did was widen the range for cash generation just to open up business and cycling of the business, which is more revenue related and capital consumption from CapEx. So at the end of the day, if you take a look at what was generated for full year of 2018, we came slightly below 10% if we normalize with the cash cost of the restructuring actions. Despite the fact that having CapEx up a little bit. We're getting a little bit penalized in Q4 because of the fact that the growth rate was so robust.
So you've got some amount cash that's hung up in receivables. So on one hand, we don't want to manage that cash number where to the extent that we're not taking orders and making deliveries because we prefer to have the operating profit quite frankly. So what we the way that we look at it here or should look at it here is it's a self liquidating balance sheet, right? We accommodate the negative impact of higher revenues. We're taking the earnings and we've just got to get really good at cycling our receivables and working on our payments.
So it's just kind of the working capital point of it. But on the other hand, it's not as if we can get cornered into 10% of revenue where we say, oh, wait a minute, stop shipping, if you will.
No. Thanks. That makes sense. Just the perception, I think, was that the Apergy business was a big cash generation. And ex Apergy, I think it was nice to see the cash is still very good.
Thanks.
Yes.
Our next question comes from the line of Jeffrey Sprague of Vertical Research.
Thank you. Good morning, everyone. And just back to Refrigeration, I mean, I guess unannounced restructuring is unannounced. But the automation and reefer is increasing your capacity in Richmond, I mean, it certainly follows that you need to make some other moves at some point in that business, I would think, or do you in fact see growth clearly picking up where you're not in a situation where you have overcapacity?
At demand levels that we forecasted for 2019, we will be over capacitized.
Yes. And just thinking about these orders, Rich, in Refrigeration you're seeing now, Is the pricing on orders such that you feel better, decent on the margin trajectory in Refrigeration over the course of 2019?
I'd like the pricing to be better is the honest answer. But we've modeled in kind of exit pricing or current market conditions. 1 would hope if demand was to accelerate in excess than what we've modeled in here, that there would be some room for pricing. But right now, I think that we've got a pretty cautious view about demand and pricing for retail refrigeration in 2019.
Great. And then just one other one. Would it never occurred to me that Unified Brands would have been that big of a restructuring opportunity, but is this something that you get executed fairly quickly here in the first half or is this drawn out over some period of time?
Don't look at the supplemental chart and say that's all Unified Brands. A piece of that is Unified Brands, but there's a variety of other smaller projects in there. Unified Brands tends to be the one we're using as an example because the footprint consolidation is quite large. And we started that in Q4 and it's pretty much going to take us through the first half of twenty nineteen to complete.
Terrific. Thank you.
You're welcome.
Our next question comes from the line of Andy Kaplowitz of Citibank.
Good morning, guys.
Hi, Andy. Good morning.
Richard, at your Analyst Day, you mentioned that DSS was finalizing the path to 15%, 17% margin. You mentioned in your Q3 call that you're happy with DSS' exit margin rate. It does look like margin overall in fluids is quite good. So how much has DSS already improved in margin and has the improvement been faster than you expected?
The DFS margin in Q4 was slightly below the exit rate of Q3, but that was entirely driven by geographic mix. So it's been sequentially getting better through 2018. And as I mentioned in my comments, one of the if you look at if you do the math on the incremental margin on the EPS bridge, you're going to see at the lower end of the revenue side that it's pretty robust and a lot of that is the non reoccurrence of some of the issues that we dealt with in 2018. I think that the margin targets that we showed in 2,000 in September are real, and we're going to be tracking progressively to realizing those margins through 2019 under current demand scenarios.
Okay. That's helpful, Rich. And then maybe you can break down a little more the 17% growth in Fluids. I mean, you talked about strength in Pumps and Process Solutions. The DMV impact the quarter did a pickup in the quarter.
And with the bookings strength in the segment, is it fair to say that there's high confidence in the 3% to 4% growth forecast for 2019 given the backlog that you have?
We like our exit growth rate and we like our book to bill and that is reflected in what we're expecting that we're putting out there for the guidance for the segment. As you know, what we have, what we can see is into Q2 at the present time. So look, we feel good where we are despite a lot of negativity in terms of sentiment about the demand environment for everything going into 2019. So we feel good about the forecast that we have out there. In terms of the growth rate, the fastest growing portion was DFS or fluids or the fluids business of the retail fueling.
But having said that, the balance of the portfolio really grew well. We've commented before, I think, in Q2 and maybe to a lesser extent of Q3 on the MOG business, which is very much project related, that was a large contributor to the growth in the incremental margin also for the quarter.
Thanks, Rich.
You're welcome.
Our next question comes from the line of Julian Mitchell of Barclays.
Thanks. Good morning. Maybe just a question around capital deployment. I think you'd noted that the assumptions for 2019 on EPS did not embed much in the way of extra buyback or obviously any unannounced M and A. So maybe just update us on how you see your capacity for capital deployment at least this year, even if you're not giving us guidance on the buyback and how you see the preference of acquisitions versus buybacks to use that capital?
Sure. Well, I think in terms of the hierarchy, it's the same as we have presented in September. That we've got a bias for organic investment because that's where the returns are highest. And really, the biggest change year over year is what we're doing in terms of organic investment, which is reflected in the CapEx slide. We just completed an acquisition or an inorganic investment in the car wash equipment business.
We gave the criteria of what we were looking for in September in terms of margin expansion, execution risk and return on invested capital hurdles. That particular one meets all three. So we feel quite good there. We've got a reasonably good pipeline that we're taking a look at right now. And the size of that pipeline in terms of the scale of those opportunities are more or less around where that Bellinger acquisition was.
So that's the kind of color I can give you on. Whether we'll execute or not, who's to say, but we're not going to sit on cash as we build it through the year.
Thank you very much. And then my second question would be going back to the fluids business again. Talk about any updated thoughts around the U. S. Retail fueling build out, not just the revenue assumptions maybe for this year and medium term for that EMV aspect, but also I guess how you're handling that in terms of working capital build, which was something you'd mentioned once or twice on the prior earnings call?
I'll deal with the working capital one, and I'll let Brad take the EMV because, of course, we always have an EMV slide somewhere around here. Yes, on the working capital side of DFS or retail fueling, I think we have the conversion in our orders was very robust in Q4. So we go into 2019 with not a lot of inventory. What we do have is the receivable balance from that strong growth. So in total working capital, we had highlighted the fact earlier in the year that we were going to build safety stock to accommodate what we thought was going to be a robust demand environment.
We got it at the end of the day. But from a working capital point of view, if there's any negativity of growing, it's the fact we hung it up on receivables. But I'll leave it to Brad to comment on
what how EMV participated in Q4 and what our view on EMV is for 19? Sure, Rich. When I speak about EMV, just a reminder, I'm not talking about dispensers that are EMV ready. It's really the component pieces. And we stay on track and track it very carefully.
I would say second half of 'eighteen, including the Q4, was above 'seventeen, so we came out of that air pocket in the first half. Sequentially, we go into 2019 and we see growth in solid year we see growth sequentially and solid year over year growth in EMV. I would say DFS, our business leadership is really very confident in terms of how we see now line of sight to EMV for 2019 based on discussions with our customers and specific projects. So EMV is shaping up to be year over year up into 2019 sequentially improving throughout the year.
Great. Thank you. Thanks.
Our next question comes from the line of Nigel Coe of Wolfe Research.
Thanks. Good morning. Can you hear me?
Yes, we can, Nigel.
Okay, that's good. So I just want to touch on the bookings, 10% bookings growth. Obviously, you went through a lot of detail in the slides. But I'm just curious because number 1, it's broad based and secondly, it's 10% is probably going to be one of the best we see this quarter. So is there anything different about the investments you've made or the structure that you've been placed that could explain the inflection orders?
Or is it just one of those things?
I think that it's one of those things. I mean, I think it's a reflection of the fact of the exit rate on the growth. I think it's a reflection on in certain businesses that lead times have gotten extended because of supply chain. I mean, there's an overall view, I think, in the market because of strains of tariffs and a variety of things that people are getting worried at the performance of supply chains to a certain extent. So they're getting in front a little bit of getting in line for what they believe that they need for 2019.
So overall, I don't think there's anything in there except for the fact that we've been on a pretty good our businesses have been on a pretty with the exception of refrigeration, been in a good place in terms of top line growth. And there's an overhang of worry about our supply chains getting extended and a variety of other things. And that's allowed us to go out and ping our customers and say, look, if you really want first half deliveries, you got to get in line.
Okay. Understood. That makes sense. And then just want to go back to Steve's question on free cash flow. The 8% to 12% is obviously a very wide range, about $3,000,000 of bandwidth on free cash flow.
I understand the CapEx headwind, but is there anything else that's highly variable within your free cash builds, cash restructuring, etcetera, that could explain that wide range?
It would be growth at the end of the day. Our expectation is we would actually underperform when the top line is moving up aggressively, and we would overperform as the businesses liquidate their balance sheet. Off the midpoint, yes.
Great. Thanks, guys.
Thanks.
Our next question comes from the line of Mig Dobre of Baird.
Yes. Good morning everyone. Just going back to Refrigeration here, and I understand that you guys remain cautious into 2019 and that business struggled a lot, but orders were finally decent maybe for the first time in almost 2 years. So I'm wondering if there is something specific in the quarter of any customer, anything that happened that would be discrete or is this market is finally starting to turn around a little bit?
I think it's not any particular customer. It's broad based of our traditional customers. And I think overall, it's just a reflection of capital investment in retail food has been low for quite a long period of time, and it's coming off easier and easier comps as we've gone through the cycle. So we're grateful for it. I think it's good for morale in the business, but we remain cautious and we'd like just to continually update it hopefully quarter by quarter if these kinds of trends hold.
I see. And in terms of what you're hearing from your salespeople, is it any particular vertical? I mean is it dollar stores or the big retailers and anything else that you can say about demand?
I don't want to get into individual customers, but it's big box and all other.
Lastly, on Belvac, anything you can talk about in terms of demand? And I presume that the comps are getting a lot easier going forward. How do you think about that business in 'nineteen?
If we go back and look at Belvac's performance over time, it's been lumpy. I think it's just become more material to the segment because of the fact that refrigeration has shrunk so much. So there's nothing particularly wrong with Belvac. It's a CapEx driven business from the beverage side, and it was just a bad year. A lot of projects got deferred and a variety of other things.
So I think we've also got a cautious view. We're engaging with all of our customers, but we'd like see the backlog build sequentially, and then we'll comment it over the year.
Our next question comes from the line of Scott Davis from Melius Research.
Hey, good morning guys.
Hi, Scott.
I don't know much about this Car Wash Equipment business and maybe this would be a good opportunity late in the Q just for you guys to help educate us a little bit. I mean, how many other opportunities are there are there out there to really roll it up? Is it already consolidated? Is it just help us understand really where you're going with it?
Yes. I don't know if I want to opine on kind of one of our longer term strategy. Let me just back up and say that within OPW, there has been a car wash business PDQ. It's been accretive to both the segment and the company. We like the trends in car wash.
This particular acquisition is of a size that we think that it's from an execution point of view. It's very doable for us, And it widens our portfolio and our strength with our distributors, meaning now that we've got a tunnel product to go along with our traditional position. So we like the secular trends in Car Wash in terms of the growth profile, and we like our historical performance in terms of margin. And like I said, it checked the box on return hurdles and execution risk. It's a fragmented market.
There's but on the other hand, it's now that we've done this acquisition, we are one of the largest players, at least in North America. So we like the market structure also. But I think and to the extent that there's additional opportunities, we'll continue to take a look at them. But it really did check a lot of boxes for companies that we're looking for.
Fair enough. And then I'm sure you guys are sick and tired of answering questions on Refrigeration, but I'm going to pile on a little bit.
What's been
the customer response to cutting SKUs, cutting capacity? I mean, is there generally an understanding that the customer level that you just don't have a choice and you need to make these moves? Or has there been some sort of pushback, particularly on SKU rationalization?
Yes. No one likes it at the end of the day. I think that our track record in the second half of the year in terms of trying to run the business while preparing it for a transformational change. I'm sure that we have made some of our customers unhappy. I think that we're working diligently to kind of lay out path where this gets our costs in control, and we believe very much that it's going to improve our quality over time.
But having said that, I think that the business has been around a long time. I think there is an amount of goodwill, but clearly, we're going to need to execute in this project as we go through. It's probably the biggest project that we have in right now for 2019.
Okay. Fair
enough, Rich. Good luck to you, Brad, too.
Thanks, Scott. Thank you.
Our next question comes from the line of John Inge of Gordon Haskett.
Good morning, everybody. Good morning. Good morning, guys. So just how did the quarter progress? And I ask the question because some companies have called out a softer December, particularly end of December.
Some have called out sort of a softer October that picked up back up in November. And I'm just curious because obviously you don't have necessarily a broad line of economic businesses that are kind of specific to Dover. But the trend that you saw against the backdrop of global economy softening, softening in Asia, does that give you any kind of pause or what to watch for as these quarters come through in 2019?
I think that our biggest worry in the quarter was conversion of what we had in the backlog. I think we got a little bit in a perfect world, we would have converted earlier in the quarter and not had to run like crazy during December from both a production point of view and from a cash point of view. But as I said in my opening comments, it got a little dicey, but we were able to get it out the door and collect it. So I think from an execution point of view, I think that the organization should be proud of themselves. We dispatched the segment management to China because we read the same things that everybody else did.
So segment management spent a week in China recently to go and see how it's impacting our business and the like. Our management in China is feeling pretty confident. Now we've got really 2 revenue streams in China. It's the consumables portion of Markham Homage, which is relatively stable business and then the regulatory piece of fluids, which is geared towards OPW, which generally has a decent line of sight in terms of backlog. So we're cognizant of the risk out there, but right now, our projections for China are for it to grow in 2019.
Rich, in the last recession, refrigeration got clipped. And what's different about this go around depending on how the economy plays out, but at some point we'll get another recession. Refrigeration is obviously not stopping or starting off a high base. And I'm just curious, you as a company have talked about the fact that the next downturn you'd perform kind of much better, obviously, given Apergy is no longer there. But what about Refrigeration?
I mean, are we at a base level that if there was a broader economic downturn, you think that, it would perform better? Or is it just a lower base and it would still go down the way it's done historically? Yes,
John, I can't add anything to what you said. I haven't been around long enough to really think about it specifically as it relates to refrigeration, but you put your finger on it at the end of the day. If it was to happen this year, God forbid, we're at such a low base of refrigeration. I'm not I mean, we're below replacement at this point.
Okay. So it's fair
to say you feel, obviously, I think, very good about the base, at least in the context of possible risks to the economy without putting words in your mouth?
Well, no, I think I'll feel really good if we execute on our plans in 2019. I mean 2018 was a tough year, I think, for the management of the business and for us. I think that we've got a good plan. I want to see us executed, and I'm going to feel a lot better about it.
Just lastly, Rich and Brad, the $18,000,000 of benefit you've called out from near term footprint consolidation, presumably this is part of a Phase 2, if you will, in Dover's evolution. Where would you put this in that context? You've talked about, right, the 200 manufacturing warehouses. I mean, is this a is there any way to size this in any sort of a way or?
I think the way to answer it, John. Yes, I think the way to answer it is twofold, that when we had the meeting in September, we said that the priority was to go after SG and A first because it was a one for one benefit and it was in your control so you could execute it. Then we said that we moved on to footprint. Footprint is a lot more risky and the timing of acting among the footprint is a lot longer. So that's why you see us taking a relatively small charge in the end of 2018 and the real benefit, the total benefit is in 2019.
So if you calculate the returns, they're still excellent, but we've got to run a business here, right? And we don't want it to impact the top line. So we're being pretty deliberate about how we execute these things.
But in the big picture, Rich, could even if it takes several could footprintbase to be as big as the SG and A?
I don't want to size it, but that was a relatively small start that we've taken and we're forecasting $18,000,000 So we look at this as a multiyear program.
Got it. Thanks very much.
You're welcome.
Our next question comes from the line of Deane Dray of RBC Capital Markets.
Thank you. Good morning, everyone.
Good morning.
Hey, I want to circle back on fluids. And Rich, you talked about one of the benefits because first of all, we don't see organic growth rate in that segment as strong as 17%. So can you take us through with any more color the impacts of mix and pricing? And then you also said there was a benefit of some of the cost out there as well.
I don't want to start I think we can do those with follow ups. I think at the end of the day, the 2 biggest driving issues within the segment were retail fueling. We've been talking, I guess, in the second half of the year that because of footprint consolidation, we got a little bit behind in terms of our backlog and we had a lot of catch up to do. Plus the fact Brad took you over took you through that EMV is starting to come through, which is a positive for 2019. And the fact, I think, that we talked about earlier in the year, some of the margin was related to mix, and that's project related work that's driven by the So what we got in Q4 was very good conversion, maybe not so much in EBIT or as much as we'd like in EBIT, but on the top line of converting of the backlog in the retail fluids business and a lot of shipments out of mod, which are good for margins.
Got it. And then you mentioned tariffs as a factor in fluids. And then can you also address how you did in oil and gas broadly away from retail fueling?
The tariff related what I mentioned about tariffs is the fact that we believe that it is contributing a little bit to the build in the backlog, right? Everybody is worried about the supply chain, which and a piece of that is tariffs. So customers that have plans, CapEx driven plans or demand plans for 2019, we feel that's what's contributing somewhat to the good order book that we have. In terms of our view on tariffs, we will be able to cover the tariff impact with pricing and productivity, and that's our expectation for 2019.
And oil and gas?
Our oil and gas exposure now is relatively low with the spin off of Apergy.
But you still have residual oil that shows up in midstream. Any color there?
Yes. It's not an overly material number and quite frankly because a lot of our pumps business is sold through distribution. I mean, I guess we could do the work at the end of the day, but it's hard to parse it.
Our next question comes from the line of Joe Ritchie of Goldman Sachs.
Thanks. Good morning.
Hi, Joe.
So I guess my first question is just on the CapEx investments, Rich, and how are you thinking about the expected payback from those investments?
Look, we wouldn't be doing them unless we had positive NPVs on them at the end of the day. I called out the 2 bigger ones because they've got a little bit of different profiles, right? So it was to kind of message in terms of what we will consider when we do big CapEx projects. One was on the colder business, which is our connector business. I believe it was the fastest growing or maybe in 2nd place fastest growth business that we had in 2018 and the margin is positive to both the segment and the group.
So if we're going to invest in capacity expansion, that's a pretty good candidate. So we like the dynamics of that business and we were getting chockablock in terms of our ability to grow based on our footprint. The other one is driven by what we're doing in terms of retail refrigeration and that let's put that in kind of the productivity bucket rather than kind of the expansion bucket, right? And both have different dynamics in terms of how we model the return, but both of them are very NPV positive as long as we execute correctly.
Got it. That's helpful. And then I guess just my one follow on. When you think about the $72,000,000 in incremental SG and A savings that come through this year, how are you thinking about that coming through? Should it all be should be pretty linear, just given that the actions were taken in 2018?
Yes. That's the way we think about it, linear.
All right, cool. Thanks, guys.
You're welcome.
And ladies and gentlemen, we do have time for one more question. Our final question will come from the line of Josh Pokrzywinski of Morgan Stanley.
Hi, good morning guys.
Good morning, Josh.
Rich, just first question on some of the footprint consolidation and some of the longer term optionality. I know it's probably premature to size it, but thinking about the percentage of the footprint that's been evaluated, so just looked at so far, what does that $18,000,000 of savings really comprise? Is it that you've looked at onethree of the business, you've looked at 25%. Just trying to get a sense for at least what's gotten kind of the first blush so far.
Well, I think that we've taken a look at the entire footprint, but not so a cursory view of identified opportunities by operating company. Then we've kind of put them in order in terms of the our ability to execute both as a group and by that individual operating company. And that's and so we force rank them based on that. So we've got a relatively long pipeline, but execution risk in some is a lot higher than others. The need to do it from a margin enhancement point of view is higher than some than others.
I think that we signaled in September the 2 segments that are challenged from a margin point of view. So our bias would be to act there first. But then it comes back to the organization's ability to execute. And we're bringing in resources in 2019 to kind of accelerate our way through 2019. But the fact of the matter is the group's track record in doing facility consolidation is not great.
So we want to be relatively deliberate and get some momentum of successful projects and then begin to roll.
Got it. That makes sense. And then I think a couple of questions have kind of nipped at the edges of this. But Fluids guidance of 3% to 4% organic coming off of a pretty big quarter, I think an easy comp in the Q1, good bookings, decent visibility with EMB. I think you added all up, things should be probably to the high end or maybe even above the high end.
I guess the one comment that you made earlier in maybe the prepared remarks was about clearing some of the backlog there. Is that really what pulls that within the range? Is more that you had some of this business that was pent up, you've worked through it and maybe now the comp is not as easy as it appears as of the Q4. Just trying to calibrate how do you stay within the range there?
Yes. Well, we've been having quite the dialogue around here between our very good performance and and conversion and how that affected the top line versus what our guidance was going to be versus the market saying that there's a slowdown on the horizon and everything else. We feel great about what happened in Q4. I don't think that we could keep that level up through the year, but there's no reason for us not to hit the top end of the range. But these are businesses that don't have a lot I mean, they're so small in their nature.
There's not a lot of secular stories behind them. So we took kind of a middle of the road view. And to the extent that the demand is there, then we'll push the top end as hard as we can sequentially through the quarters. But I think it would have been a little bit difficult for us to take Q4 and say, well, based on that and our backlog, this thing just rolls through 2019. We just don't have enough visibility right now.
No, I think that's fair. I guess the question is relative to the rest of the business, it seems like you've baked in more of a soft landing from a macro perspective there than elsewhere. Is that kind of a fair starting point?
That's fair.
Got it.
Okay. Appreciate the color. Thanks guys. Yes.
And thank you. That concludes our question and answer period. I would now like to turn the call back over to Mr. Galuk for closing remarks.
This concludes our conference call. Thank you for your interest in Dover and we look forward to speaking to you next quarter.
Thank you. That concludes today's Q4 2018 Dover earnings conference call. You may now disconnect your lines at this time and have a wonderful day.