Good morning, welcome to Dover's fourth quarter 2018 earnings conference call. Speaking today are Richard J. Tobin, President and Chief Executive Officer. Brad Cerepak, Senior Vice President and Chief Financial Officer, and Andrey Galiuk, Vice President of Corporate Development and Investor Relations. After the speaker's remarks, there will be a question and answer set period. If you would like to ask a question during this time, simply press star, then number 1 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, your participation implies consent to a 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. Andrey Galiuk.
Mr. Galiuk, please go ahead, sir.
Thank you, Maria. Good morning, welcome to Dover's fourth quarter and full year 2018 earnings call. We'll begin with comments from Rich and Brad, we'll then open the call for questions. This call will be available for playback through February 19th, the audio portion of this call will be archived on our website for three months. The replay telephone number is 800-585-8367. When accessing the playback, you'll need to supply the following access code, 6883448. 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-K 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'd like to turn this call over to Rich.
Thanks, Andrey, and good morning, everyone from balmy Chicago. Let's get started on slide three. Q4 organic revenue growth was up 6.2% for the quarter. Solid demand trends in Engineered Systems and an exceptionally strong performance in our fluids segment more than offset the continued weak demand environment in Refrigeration and 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 determinate 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 one, which were broad-based across the portfolio. Our SG&A rightsizing initiative is largely complete. During the quarter, we began the first projects for our footprint rationalization plan, particularly with the three to one production site rationalization in Unified Brands, which is underway. In Q4, we have taken our initial restructuring charge of $5 million as a result of the announced footprint consolidation efforts, which we forecast to deliver $4 million into 2019, an annualized run rate savings of $18 million. Finally, on the inorganic growth front, last Friday, we completed the acquisition of Belanger, a leading car wash equipment manufacturer, which we announced earlier in the month.
Belanger 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. 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 four. 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 million, and adjusted margin was 15.7%, an increase of 80 basis points. This performance reflected strong growth and conversion in Engineered Systems and improved performance in fluids, partially offset by lower volume in Refrigeration and Food Equipment. Adjusted segment EBITDA was $352 million. Adjusted earnings were $211 million 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 fourth quarter.
Results were largely driven by strong growth across our Engineered Systems and Fluids 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 billion. 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. Turning to slide five, let's get into a little bit more detail on revenue and bookings results in the quarter. Fourth quarter revenue grew by 3.2% to $1.8 billion. 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 million or 4.3% organically, and Fluids grew $118 million or 17.2% organically on broad-based activity across the segments. Delayed shipments in can-making equipment and weak retail refrigeration markets drove a $39 million or 10.2% 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 fourth quarter, our retail refrigeration 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 both over the third quarter of 2018 and the fourth quarter of 2017. Of note, Engineered Systems and Fluids organic bookings grew $86 million and $54 million, respectively, reflecting broad-based market demand.
Refrigeration and Food Equipment segment bookings grew $25 million organically on improved orders at retail refrigeration and exceeded revenue by $14 million 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 six. Starting on the top, Engineered Systems adjusted segment EBITDA improved $11 million, 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 million reflects a combination of robust growth, better execution in retail fueling, as well as strong conversion on volume in other businesses. The $22 million 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&A initiative contributing $22 million of savings to Q4 results. Going to the bottom of the chart, adjusted earnings from continuing operations improved $31 million or 17%, primarily driven by higher segment earnings, lower interest in corporate costs, partially offset by higher taxes on increased earnings. On slide seven, 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 fourth quarter is traditionally our highest cash flow quarter.
Free cash flow for the year was $618 million, or 8.8% of revenue, within our guidance from our Analyst Day in September. Cash costs of $52 million associated with our restructuring initiatives negatively impacted cash flow in the year. Excluding such non-recurring cash outlays, free cash flow was 9.6% of revenue. Let me turn it back to Rich.
Okay. Thanks, Brad. Let's go on to slide nine. Engineered 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 & Identification platform, despite a more modest top-line growth rate in Q4. The industrial platform performed well across the board as our CapEx-levered businesses continued to operate in the 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, DESTACO 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 Engineered Systems remain solid.
We 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 Markem-Imaje, 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 Maag, Hydro, and Precision Components in excess of 35% in the period as a result of volume leverage, mixed 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 fourth 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 in refrigeration and mix at Belvac. The segment also incurred transitory costs associated with product rationalization programs in refrigeration in preparation for our automation efforts to be built out in 2019.
Positively, retail refrigeration bookings were up for the first time in six 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 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. Let's move on to the guidance. Our full-year guidance is made up of the following.
2%-4% organic revenue growth, 2%-3% total revenue growth positively impacted by acquisitions of 1%, offset by FX 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 a following slide. The range on free cash flow conversion reflects the announced restructuring programs that there's a backup slide on, and an adjusted EPS guidance of $5.65-$5.85. Guidance does not include unannounced footprint actions to be taken in 2019. Let's go and take a look at the EPS bridge on the following slide. As a starting point, the 2018 EPS has been normalized for 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&A rightsizing carried into 2019, as well as the impact for announced footprint actions. We have included supplemental slides in the backup for you to take a look at. $0.08 per share from the Belanger acquisition, which we closed January 25th. $0.19-$0.39 of conversion of the revenue range, and $0.15 from tax rate, 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%-40%, driven by several significant projects. A $26 million 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 million 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%-2.5% of revenue, despite significant investment in our digital initiatives. Dover enters 2019 with solid momentum as 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 those 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 Belanger. That concludes the presentation, and we will open up for questions. Andrey?
Maria, we can open up the Q&A.
Thank you. The floor is now open for your questions. Again, if you wish to ask a question, please press star then the number one on your telephone keypad. If you wish to withdraw your question, press the pound key. In the interest of time, we do ask that you please limit yourself to one question and one follow-up question. Our first question comes from the line of Steve Tusa of JPMorgan.
Hey, good morning.
Hi, Steve.
Good morning, Steve.
Just curious. CapEx going up quite a bit next year, yet you're still guiding to kind of 8%-12% of sales and free cash flow. I know there is some noise around restructuring this year and maybe, obviously, some working capital headwinds. 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, call it a normalized cash flow for the cash impact of the restructuring operations. I mean, we were just under 10% for the year. With the strong revenue growth in Q4, we had some amount of cash flow that was hung up in receivables. If you take a look at next year, the revenue growth is not at that same kind of momentum. We would unwind that Q4 revenue through cash flow. Quite frankly, it's not as if we're up, we're performing at 100% in terms of cash conversion. Making up that $30 million-$40 million over the year, we've got the ability to do it. I know that we're forecasting to spend more for CapEx.
We believe in the projects we're doing it, we don't think that spend on CapEx is negatively going to impact the cash flow target for 2019.
Okay. Just quickly on product ID, I'm not sure if you mentioned this in the prepared comments, how are orders there in the fourth quarter? There was a kind of a smaller cap peer that talked about some weakness in digital printing. I know you guys, digital printing, it's maybe 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?
Yeah, I mean, look at digital printing in terms of its margin performance year-over-year, did a fantastic job. As you know, these are high-dollar printers, the revenue tends to be a little bit lumpy. It is reflected in our book-to-bill in printing, and ID is not so much the Markem-Imaje piece, it's more just the lumpiness of the orders. Our expectation for digital print for 2019 is to increase revenue.
Okay.
Markem-Image, can I add?
Yeah.
I would just add that Markem-Imaje has been steady all year long at above 1 book-to-bill. That business remains solid for us.
I guess Dover Digital Printing was the reason for kind of the weaker orders in the quarter. I think you said they were down.
Yeah.
Yeah.
Yeah.
It's just the lumpiness of when we get the low areas.
It's timing, Steve.
Yeah, okay. All right. That makes sense. Thanks a lot, guys. Appreciate the detail.
Thanks.
Our next question comes from the line of Nigel Coe, Wolfe Research.
Good morning, Nigel. Are you there?
It looks like Nigel withdrew his question. We'll move on to Andrew Obin of Bank of America, Merrill Lynch.
Yes, 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?
No, not necessarily. I mean, we are investing in retail refrigeration and automation. That is going to progressively come online. Expand the capacity of the footprint in Richmond. 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. 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 Unified Brands bringing the footprint from three to one, which is underway.
Got you. Okay, that makes sense. The second question, just going back to cash flow. This range of eight to 12, can you bracket what drives the range? 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 the imagination. I think that what we did was widen the range for cash generation just to open up business and recycling of the business, which is more revenue related, and capital consumption from CapEx. 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 for 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. You've got some amount of cash that's hung up in receivables.
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. The way that we look at it here, or should look at it here, 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. It's just kind of the working capital point of it. On the other hand, it's not as if we can get quartered into 10% of revenue where we say, "Oh, wait a minute, stop shipping," if you will.
No. 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.
Yep.
Our next question comes from the line of Jeffrey Sprague of Vertical Research.
Thank you. Good morning, everyone.
Good morning.
Just back to refrigeration. I guess, unannounced restructuring is unannounced, but if the automation in reefers increasing your capacity in Richmond, it certainly follows that you need to make some other moves at some point in that business, I would think. 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.
Yeah. 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. We've modeled in kind of exit pricing or current market conditions. One would hope if demand was to accelerate in excess to what we've modeled in here, that there would be some room for pricing. Right now, I think that we've got a pretty cautious view about demand and pricing for retail refrigeration in 2019.
Great. Just one other one. Would have never occurred to me that Unified Brands would've been that big of a restructuring opportunity. 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 example because the footprint consolidation is quite large. We started that in Q4, and it's pretty much going to take us through the first half of 2019 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 annual stage, you mentioned that DFS was finalizing the path to 15%-17% margin. You mentioned in your third quarter call that you were happy with DFS's exit margin rate, and it does look like margin overall in fluids is quite good. How much has DFS 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. It's been sequentially getting better through 2018, and as I mentioned in my comments, 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 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. Maybe you can break down a little more the 17% growth in fluids. You talked about strength in Pumps & Process Solutions. Did EMV impact the quarter? Did it pick up in the quarter? With the book-to-bill strength in the segment, is it fair to say that there's relatively high confidence in the 3%-4% growth forecast for 2019 given the backlog that you have?
We like our exit growth rate, we like our book-to-bill, and that is reflected in what 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. We feel good where we are despite a lot of negativity in terms of sentiment about the demand environment for everything going into 2019. 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 on the retail fueling.
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 Maag 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&A. 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 had presented in September, that we've got a bias for organic investment because that's where the returns are highest. 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. The size of that pipeline in terms of the scale of those opportunities are more or less around where that Belanger acquisition was.
That's the kind of color I can give you on. Whether we'll execute or not, who's to say? We're not going to sit on cash as we build it through the year.
Thank you very much. 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. On the working capital side of DFS or retail fueling, I think we have the conversion in our orders was very robust in Q4, we go into 2019 with not a lot of inventory. What we do have is the receivable balance from that strong growth. 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, from a working capital point of view, if there's any negativity of growing, it's the fact that we hung it up on receivables.
I'll leave it to Brad to comment on how EMV participated in Q4 and what our view on EMV is for 2019.
Sure, Rich. When I speak about EMV, just a reminder, I am not talking about dispensers that are EMV-ready. It is really the component pieces. We stay on track and track it very carefully. I would say second half of 2018, including the fourth quarter, was above 2017. We came out of that air pocket in the first half. Sequentially, we go into 2019, and 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 in specific projects. 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 Nigel Coe of Wolfe Research.
Thanks. Good morning. Can you hear me?
Yeah, we can, Nigel.
Okay, that's good. I just want to touch on the bookings, the 10% bookings growth. Obviously, you went through a lot of detail in the slides, I'm just curious because, number one, it's broad-based, and secondly, 10% is probably going to be one of the best we see this quarter. Is there anything different about the investments you've made or the structure that you've put in place that could explain the inflection in orders, or was it just one of those things?
I think that it's one of those things. I think it's a reflection of the fact of the exit rate on the growth. I think it's a reflection on certain businesses that lead times have gotten extended because of supply chain. 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. They're getting in front a little bit of getting in line for what they believe that they need for 2019. Overall, I don't think there's anything in there except for the fact that our businesses have been on a pretty, with the exception of refrigeration, been in a good place in terms of top-line growth.
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. Just want to go back to Steve's question on free cash flow. The 8%-12% is obviously a very wide range, about $300 million of bandwidth on free cash flow.
I understand the CapEx headwind, is there anything else that's highly variable within your free cash builds, cash restructuring, et cetera, 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, we would over-perform as the businesses liquidate their balance sheets.
Off the midpoint, yeah.
Great. Thanks, guys.
Thanks.
Our next question comes from line of Nick Dubreuil of Baird.
Yes. Good morning, everyone. Just going back to refrigeration here, I understand that you guys remain cautious into 2019. That business struggled a lot. Orders were finally decent, maybe for the first time in almost two years. I'm wondering if there's something specific in the quarter, 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. I think overall it's just a reflection of capital investment in retail food has been low for quite a long period of time. It's coming off easier and easier comps as we've gone through this cycle. We're grateful for it. I think it's good for morale in the business. We remain cautious, we'd like just to continually update it, hopefully quarter by quarter, if these kinds of trends hold.
I see. In terms of what you're hearing from your salespeople, is it any particular vertical? Is it dollar stores or the big retailers? Anything else that you can say about demand?
I don't want to get into individual customers. It's big box and all other.
Lastly, on Belvac, anything you can talk about in terms of demand? I presume that the comps are getting a lot easier going forward. How do you think about that business in 2019?
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. There's nothing particularly wrong with Belvac. It's a CapEx-driven business from the beverage side. It was just a bad year. A lot of projects got deferred and a variety of other things. I think we've also got a cautious view. We're engaging with all of our customers, but we'd like to see the backlog build sequentially. Then we'll comment it over the air.
Thank you.
You're welcome.
Our next question comes from line of Scott Davis from Melius Research.
Hey, good morning, guys.
Hi, Scott.
I don't know much about this car wash equipment business, maybe this would be a good opportunity late in the queue just for you guys to help educate us a little bit. How many other opportunities are there out there to really roll it up? Is it already consolidated? Just help us understand really where you're going with it.
Yeah. 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. 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. 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.
At the other hand, now that we've done this acquisition, we are one of the largest players, at least in North America. We like the market structure also, and to the extent that there's additional opportunities, we'll continue to take a look at them. It really did check a lot of boxes for companies that we're looking for.
Fair enough. 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? Is there generally an understanding at 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 the SKU rationalization?
Yeah. 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 the path where this gets our costs in control, we believe very much that it's going to improve our quality over time. 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 right now for 2019.
Okay. Fair enough, Rich. Good luck to you.
Thanks, Scott.
Brad too.
Thank you.
Our next question comes from line of John Inch of Gordon Haskett.
Good morning, everybody.
Good morning.
Hi.
Good morning, guys. Just how did the quarter progress? 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 back up in November. I'm just curious, because obviously you don't have necessarily a broad line of economic businesses. They're kind of specific to Dover. But the trend that you saw against the backdrop of global economy 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.
Right.
I think we got a little bit in a perfect world, we would've 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. 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. 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, 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. We've got really two revenue streams in China.
It's the consumables portion of Markem-Imaje, which is relatively stable business, then the regulatory piece of fluids, which is geared towards OPW, which generally has a decent line of sight in terms of backlog. 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. What's different about this go-around, depending on how the economy plays out, but at some point, we'll get another recession. Refrigeration's obviously not starting off a high base. 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's no longer there. What about refrigeration? 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? I mean, I'm just curious about it.
Yeah, John, I can't add anything to what you said, right? 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 in refrigeration. We're below replacement at this point.
Okay. 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. 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 execute it, and I'm going to feel a lot better about it.
Just lastly, Rich and Brad, the $18 million of benefit you've called out from near-term footprint consolidation. Presumably, this is part of a phase two, if you will, in Dover's evolution. Where would you put this in that context of you've talked about the 200 manufacturing warehouses. Is there any way to size this in any sort of a way or-
I think the way to answer it, John, is twofold. That when we had the meeting in September, we said that the priority was to go after SG&A first because it was a one-for-one benefit, and it was in your control, so you could execute it. We said that we moved on to footprint. Footprint is a lot more risky, and the timing of acting upon the footprint is a lot longer. 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. The returns, if you calculate the returns, they're still excellent. We've got to run a business here, right? We don't want it to impact the top line, so we're being pretty deliberate about how we execute these things.
In the big picture, Rich, even if it takes several years, could footprint/phase two be as big as the SG&A?
I don't want to size it, but that was a relatively small start that we've taken, and we're forecasting $18 million. We look at this as a multi-year 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. Want to circle back on fluids. 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%. Can you take us through with any more color, the impacts of mix and pricing? 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 two 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 it in terms of our backlog, and we had a lot of catch up to do. Plus the fact Brad took you through that EMV is starting to come through, which is a positive for 2019. 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 Maag business.
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 the backlog in the retail fluids business and a lot of shipments out of Maag, which are good for margins.
Got it. You mentioned tariffs as a factor in fluids, can you also address how you did in oil and gas broadly away from retail fueling?
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's worried about the supply chain, and a piece of that is tariffs. 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.
Oil and gas?
Our oil and gas exposure now is relatively low with the spinoff of Apergy.
You still have residual oil that shows up in midstream. Any color there?
Yeah. It's not an overly material number, quite frankly, because a lot of our pumps business is sold through distribution. I guess we could do the work at the end of the day, it's hard to parse it.
Got it. Thank you.
You're welcome.
Our next question comes from the line of Joe Ritchie of Goldman Sachs.
Thanks. Good morning.
Hi, Joe.
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 two bigger ones because they've got a little bit of different profiles, right? 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 second place fastest growth business that we had in 2018, and the margin is positive to both the segment and the group. If we're going to invest in capacity expansion, that's a pretty good candidate. We like the dynamics of that business, and we were getting chock-a-block 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 let's put that in kind of the productivity bucket rather than kind of the expansion bucket, right? 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. Then I guess just my one follow-on, when you think about the $72 million in incremental SG&A savings that come through this year, how are you thinking about that coming through? Should it all be pretty linear, just given that the actions were taken in 2018?
Yeah. That's the way we think about it, linear.
All right, cool. Thanks, guys.
You're welcome.
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.
Hey, Josh.
Rich, just first question on some of the footprint consolidation and some of the longer-term optionality there. I know it's probably premature to size it, thinking about the percentage of the footprint that's been evaluated, so just looked at so far, what does that $18 million of savings really comprise? Is it that you've looked at a third 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.
I think that we've taken a look at the entire footprint, a cursory view of identified opportunities by operating company. We've kind of put them in order in terms of our ability to execute both as a group and by that individual operating company. We force rank them based on that. We've got a relatively long pipeline, execution risk in some is a lot higher than others. The need to do it from a margin enhancement point of view is higher in some than others. I think that we signaled in September the two segments that are challenged from a margin point of view. Our bias would be to act there first. It comes back to the organization's ability to execute, that we're bringing in resources in 2019 to kind of accelerate our way through 2019.
The fact of the matter is the group's track record in doing facility consolidation is not great. We want to be relatively deliberate and get some momentum of successful projects and then begin to roll.
Got it. That makes sense. Then I think a couple of questions have kind of nipped at the edges of this, fluids guidance of 3%-4% organic coming off of a pretty big quarter, I think an easy comp in the first quarter, good bookings, decent visibility with EMV. I think you add it 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 fourth quarter. Just trying to calibrate, how do you stay within the range there?
Yeah. Well, we've been having quite the dialogue around here between our very good conformance 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, there's no reason for us not to hit the top end of the range. These are businesses that they're so small in their nature, there's not a lot of secular stories behind them. 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.
I think it would've 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 call. Thanks, guys.
Yep.
Thank you. That concludes our question and answer period. I would now like to turn the call back over to Mr. Galiuk 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 fourth quarter 2018 Dover earnings conference call. You may now disconnect your lines at this time, and have a wonderful day.