Good morning, and welcome to Dover's Fourth Quarter Fiscal Year Ending 2020 Earnings Conference Call. Speakers 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 speakers' remarks, there will be a question and answer period.
If you would like to ask a question during this time, press star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key on your telephone keypad. As a reminder ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Andrey Galiuk. Please go ahead, sir.
Thank you, Nicole. Good morning, everyone, and thank you for joining our call. This call will be available for playback through February 18th, and the audio portion of this call will be archived on our website for three months. Dover provides non-GAAP information and reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on our website.
We want to remind everyone that our comments today may contain forward-looking statements that are subject to uncertainties and risks, including the impact of COVID-19 on the global economy and on our customers, suppliers, employees, operations, business, liquidity, and cash flow.
We caution everyone to be guided in their analysis of Dover by referring to our Form 10-K and Form 10-Q for the quarter and for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law. With that, I will turn this call over to Rich.
Thanks, Andrey. Good morning, everyone. Let's begin on Slide three. Order trends have remained positive across the majority of our portfolio since September, and we had a strong finish to the year. Our year-over-year backlog is up 21% as a result of general recovery trends across the portfolio, a meaningful increase in the DFRE segment backlog, and some recognition from our customers that raw material costs and supply chain constraints are becoming more challenging into 2021, driving pre-orders in some markets.
Revenue at $1.8 billion was flat versus the comparable period. Adjusted segment operating margin at 17.1% was flat despite unfavorable revenue mix during the quarter. For the full year, revenue was down 6% and adjusted segment margin up to 16.7% as a result of structural cost savings, center-led strategic initiatives, tight cost controls offsetting the impact of fixed costs under absorption.
As we discussed at length in Q3, we are driving towards a strong cash flow performance in the fourth quarter, and we got it, with full year free cash flow increasing 24% over 2019, achieving 14% of revenue. This is what we would expect to happen as we liquidate working capital in excess of lost profits impact and as a result of efficiency gains from our back-office consolidation program. With that backdrop, we look into 2021 with conservative optimism.
Our order book is solid, albeit with a different mix as compared to last year, with DFRE having a material positive impact to the top and bottom line in 2021. We are executing on many initiatives other than structural cost takeout that are expected to deliver margin improvements, which I'll cover later in the presentation. With that, we are initiating full year guidance of 5%-6% organic revenue growth and adjusted EPS of $6.25-$6.45.
I'll not spend a lot of time on Slide four, which is a more detailed overview of the results of the fourth quarter. Let's move to Slide five. Engineered Products revenue declined on lower shipments and CapEx-levered markets such as industrial winches, waste handling equipment, and vehicle services. ESG had a tough Q4 comparable to overcome, and VSG was coming off a strong Q3, so the performance was largely expected. Both have strong backlogs into 2021.
The aerospace and defense business had a strong quarter that ended a record year for the business, and demand in industrial automation has shown robust recovery contributing to our backlog as global auto sequentially ramps production. In Fueling Solutions, as we discussed at the end of Q3, the comparable benchmark for Q4 was tough. Despite the top-line pressure, the segment posted another quarter of strong margin performance on lower volume as our productivity actions remain durable.
We are beginning to see the mixed benefits from our Helix and Anthem dispenser products, which we believe are winning in the marketplace. We completed the acquisition of Innovative Control Systems in the fourth quarter, which is a great addition to our vehicle platform. ICS is a leading supplier of access, payment, and site management solutions and software, which fits into our strategy of driving long-term value from the large installed base of retail fuel sites, which we presented in October.
Sales in Imaging & Identification declined 3% organically. The core marking and coding business grew on continued healthy demand for consumables and improvement in demand for printing equipment with particularly healthy activity in the United States. Digital textile printing CapEx remains slow. We begin seeing recovering demand for consumables and small format machines, which are likely harbingers of conditions normalizing in 2021. Imaging & Identification is our highest gross margin segment.
The marking and coding business has delivered commendable margin performance this year, holding the profit line virtually unchanged. However decrementals in textile printing on lower volumes weighed on the segment margins in Q4 and during the full year. We expect this to begin reversing progressively into 2021. Pumps & Process Solutions returned to top-line growth in the fourth quarter on strong growth in biopharma, medical, and hygienic applications.
We also began seeing cyclical recovery in industrial pumps, which posted growth after several soft quarters. Compression components and aftermarket continued to be slow. Recent trends in natural gas and LNG markets gives us grounds for optimism going forward. The fourth quarter closed off a solid margin performance in this segment, with margins expanding 150 basis points in Q4 and 220 basis points for the full year.
This was driven by broad-based productivity efforts, cost controls, favorable mix, and well-timed capacity expansion in biopharma and medical, which we highlighted earlier in the year. Refrigeration & Food Equipment posted 13% organic growth, with all businesses except Food Service Equipment delivering the increase. A significant portion of the growth came from the well-advertised strength in can making.
We are also very encouraged by activity in core food retail market, which grew organic top line at high single digits in the quarter, driven by the continued strength in the door case product line, where we saw double-digit growth for the full year. The heat exchanger business grew on robust demand in heat pumps and residential applications, as well as refrigerated transport and industrial applications like semiconductors and data centers.
Margin performance expectedly improved, supported by volume and actions we took in the middle of 2020. Absolute earnings increased 71% in the quarter over the comparable period. This margin performance, coupled with the upcoming ramp-up of automated case line in food retail, positions us to deliver material margin expansion in 2021. I'll pass it to Brad here.
Thanks, Rich. Good morning, everyone. Let's go to Slide six. On the top is the revenue bridge. Our top line continued its recovery with sequential improvement in organic revenue over Q3. Several of our businesses, including short-cycle industrial pumps and heat exchangers, returned to positive growth in the quarter. While biopharma, aerospace and defense, marking and coding, food retail, and can making continued their positive growth trajectory from prior quarters.
FX benefited the top line by 2% or $34 million, driven principally by a strengthening of the euro against the dollar. Acquisitions more than offset dispositions in the quarter by $12 million. We expect this number to grow in subsequent quarters. The revenue breakdown by geography reflects sequential improvement in each major geography, with the exception of Asia.
The U.S., our largest market, posted a 1% organic decline in the quarter, an improvement over the 4% decline in Q3 on progressively improving order rates and a strong quarter in biopharma, marking and coding, food retail, and can-making, among others. Europe declined 3% organically, driven by retail fueling and a difficult comparable quarter in vehicle services, though partially offset by continued strength in several of our Pumps & Process Solutions businesses.
All of Asia was down 11% organically, driven principally by China, which was down 16% organically. This result in China was not unexpected, as we continue to face headwinds in retail fueling due to the expiration of the underground equipment replacement mandate. Moving to the bottom of the page. Bookings were up 2% organically, reflecting the continued momentum we see across our businesses. In the quarter, we saw organic growth in four out of our five segments.
The fifth segment, Fueling Solutions, faced a difficult comparable quarter in the prior year, as previously discussed. Overall, our backlog is currently up approximately $300 million or 21% higher compared to this time last year, positioning us well as we enter 2021. Let's go to the earnings bridges on Slide seven. We delivered improved sequential results in the quarter after a significant decline in Q2 and a recovery in Q3.
On the top chart, adjusted segment EBIT and margin were both essentially flat year-over-year as continued productivity initiatives offset negative organic growth and dilutive impact of FX on margins. Going to the bottom chart, adjusted net earnings declined $1 million as higher taxes and corporate expense offset improved segment EBIT. The effective tax rate, excluding discrete tax benefits, was approximately 21.4% for the year compared to 21.5% in the prior year.
Discrete tax benefits were $8 million in the quarter and $22 million for the year, or approximately $4 million lower than in 2019. As we move into 2021, excluding the impact of discrete taxes, we expect the effective tax rate to remain essentially the same as 2020, at about 21.5%. Rightsizing and other costs were $21 million in the quarter or $17 million after tax, relating to several new permanent cost containment initiatives and other items that we executed at the end of 2020.
Now on Slide eight. We are pleased with the cash performance in 2020, with full-year free cash flow of $939 million, a $181 million or 24% increase over last year. Free cash flow conversion stands at 21% of revenue for the fourth quarter, historically our highest cash flow quarter, and 14% for the full year, a significant increase over the prior year.
Recall on last quarter's earnings call, we decided to prioritize prudent working capital management over fixed cost absorption to close out the year, and you can see the value delivered in our year-over-year working capital comparison. We have strong revenue visibility into Q1 and confidence in our team's ability to match industrial production with improved customer demand. With that, I'll turn it back to Rich.
Okay. Thanks, Brad. I'm on page nine. Let me take a few moments to give you an update on our center-led initiatives that we outlined in our strategic plan in September of 2019. While we could have not expected what transpired in 2020, we posited at the time that our portfolio had through-cycle durability and that there were opportunities to drive synergies from our diverse portfolio to improve profitability over time.
Despite this, we often hear a notion that Dover is a cost-out story, likely because we give measurable structural cost-saving goals each year, implying a finite nature to such endeavor. There's a lot more than cost reductions to our improvement journey, and we continue to reinvest a portion of the savings, so we'll give you a short update on where we are on these strategic initiatives. Through in 2019, we began with the right sizing of our SG&A base after a significant portfolio change.
This was necessary and required immediate intervention. Since then, the improvements have been driven by steady productivity and structural cost actions by our operating units and from our investments in four core enterprise capabilities that generate very attractive return on investment and can be leveraged across the portfolio. The investments are substantial. By the end of this coming year, the headcount involved in center-led enterprise capabilities will have increased by over 50%.
These are transformational initiatives touching every corner of our global portfolio and delivering real results that you can see in our bottom line. There is significant runway to drive value. We are investing in the following four enterprise capabilities, and I will highlight a few results, but I would encourage you to review the stats in the slides. First, Dover Digital on Slide 10. This work began in 2017 and accelerated in 2018 with the opening of our Dover Digital Center in Boston.
We have over 100 e-commerce connected product and software experts dedicated to this endeavor. This team helps our businesses lever e-commerce at scale and improve the customer journey with ease of doing business as well as back-end efficiency for sales and order entry. For example, this year we target to reach a run rate of $1 billion of revenue processed through digital channels, much of which is service parts and catalog items compared to $100 million in 2019.
This team also helps our business connect their products and enhance their offerings, which we'll progressively highlight in future presentations, as we did for Fueling Solutions recently. This is a multiyear value creation journey, and we are very excited about what lies ahead for our digital team. Moving to Slide 11. Our Operations Center of Excellence is a central team of domain knowledge experts that delivers health and safety, supply chain management, lean operations, and advanced manufacturing and automation.
This team is instrumental in driving value through rooftop consolidation and automation projects. As you know, we have a number of these in the works. We are also excited about the results of the early lean initiatives this team is spearheading. This is another multiyear journey, and we will continue to deliver results. Moving on to Slide 12 is our central back-office system, which we call Dover Business Services. We've been at this for several years, and we're still in the early innings of expanding the scale and scope of this capability.
By centralizing and offshoring transactional back-office facilities, we multiply efficiency through scale, technology leverage, and unit cost arbitrage. DBS is and will remain an integral part of our margin enhancement story. Lastly, moving to Slide 13, the India Innovation Center is more than a 600-person strong team that our operating companies can leverage for product engineering, digital solutions development, data information management, research and development, and intellectual property services.
The scale and expertise of this team allows our operating companies to tap resources that would've been unaffordable to them as standalone companies and allows for concurrent engineering on time-sensitive projects. Let's sum this up on Slide 14. We laid out four pillars of our strategy in 2019 and have been delivering through cycle. We have maintained our focus on margin improvement and continue to invest despite the economic difficulties of 2020.
Our end market exposure, coupled with the strategic R&D investments, we have an attractive growth profile. We are committed to reinvesting in our businesses as a top priority in capital allocation to maintain competitiveness, fuel growth, and improve productivity. We are making good strides on the inorganic front. Finally, we're staying disciplined in our capital allocation by returning excess capital to our shareholders via growing dividends and share repurchases.
Moving to Slide 15. Where does this leave us going into 2021? We believe that our playbook offers us a significant runway to continue delivering attractive through-cycle returns through mid-single-digit top-line growth, steady margin expansion, healthy cash conversion, and disciplined capital allocation and shareholder-friendly capital return posture. Okay. We'll step off the soapbox and let's move on to Slide 16. We expect demand in Engineered Products to rebound in 2021.
We have seen strong bookings recently in vehicle services and industrial automation with relevant automotive and vehicle usage statistics trending in the right direction. Bookings have also improved recently in waste handling. We are nearly fully booked for the first quarter. Municipal demand will remain uncertain. We see strong trends in the parts and digital business. As we previewed in November, we expect Fueling Solutions to have a modest organic growth year.
There is known headwind from EMV roll-off in the U.S. There are a number of positives offsetting it. We are encouraged by the prospects of our new Anthem user interface solution offering. We expect robust growth in our systems and software business, where we'll be launching the industry-first cloud platform developed with Microsoft. We also see good setup for vehicle wash. We are excited about having ICS in our portfolio. We expect Imaging & Identification to perform well this year.
Marking and coding saw limited downside in 2020, and we've been on a good trajectory in recent quarters, despite the tough comp in Q1 due to COVID-19-driven consumable stocking. We expect further improvement in services as travel restrictions subside and activity in serialization software is also firming up. The biggest factor in this segment is, of course, the digital textile printing unit. Our initial read is for the recovery to take place in the second half of the year when printers will be ramping up production for 2020 apparel collections.
Pumps & Process Solutions are expected to have another solid year. We expect robust growth in biopharma and hygienic applications and a continued recovery trend in industrial pumps. Plastics and polymers is expected to deliver steady performance with a comparable basis to the second half, biased to the second half. Precision components is likely to experience a slower start to the year, and we're still comping versus last year's first quarter that saw robust upstream and downstream activity.
Finally, we expect a very strong year in Refrigeration & Food Equipment. The core food retail business is operating with a strong backlog, and the order trajectory has been healthy in the last few quarters. We expect retailers that had paused their remodel programs last year amidst the pandemic to restart these strategic initiatives, and we are well-positioned to participate in that activity.
Additionally, we see a good outlook for natural refrigerant systems both in Europe and also in the U.S., where California was the first state to recently mandate transition to natural refrigerant systems. We were the pioneers in this space, and we are very well positioned to capitalize on this sustainability trend in the industry. Belvac, as you know, is working through a record backlog and is booked for the year. Our heat exchanger business also exited 2020 with a record backlog and a constructive order trajectory across multiple verticals.
This will result in material margin improvement in this segment on the back of the case production automation project, higher volumes, and positive business mix. We've covered most of the items on the earlier slides, but I summarized them here on the slide for your reference.
As usual, before I wrap up, I'd like to thank everyone at Dover for their work and continued perseverance during this last year. The Dover team has delivered strong results amidst difficult conditions, and I commend all of our employees for doing their part. Andrey, with that, let's move on to Q&A.
Nicole?
If you'd like to ask a question simply press star and the number one on your telephone keypad. If you would like to withdraw your question please press the pound key. We ask that participants limit themselves to one question and one follow-up. One moment for our first question. The first question will come from the line of Jeff Sprague with Vertical Research.
Thank you. Good day, everyone. Hey, a lot of good additional information there. Just let me dig into a couple of things if I could, Rich. First, interesting what you said about kind of pre-ordering. Are you able to fully protect yourself with price and hedging and other things on that type of activity that you're seeing from your customers?
Yeah. Look, Jeff, I think we've got a couple challenges going to Q1. Raw material prices are moving up. There is a lot of constraint in logistics right now. I think that it's been going on somewhat through the fourth quarter. It looks to be getting tighter going into the first quarter as economic activity moves up. The bad news is we're going to have to deal with those constraints. We're going to have to be on the front foot in terms of offsetting raw mats, in terms of whether it's either pricing or productivity.
I think that my comment about the backlog, it is influencing demand in the backlog because I think that there's beginning a recognition out there of, "I've got to get my orders in because of these constraints." Look at what's going on in auto, just as a precursor to that. I don't think it's bad in a way, and I don't think it's negative for us in terms of people placing orders in advance of raw material costs, because I think that we've got some levers to pull there, and it's really short cycle at the end of the day.
The good news is, I think, to the extent that our backlogs go up from an S&OP process, we can plan more appropriately, and that drives efficiency at the factory level floor. Probably going to be a little bit of an interesting Q1, but I think overall, it's not insurmountable.
Great. Just shifting to DFRE. It looks like you'll have the volumes here to fully exercise the automation project. I suppose you don't want to get into margins by segments here, can you give us a little color on how the margins should play out in that business? Is there any, other than the normal seasonal peak that we'll be looking at, any other noise or movement in the margin trajectory there?
No, I would expect that the margins to comp well every quarter, but the seasonality of those margins to remain intact.
Great. Thanks.
The next question comes from the line of Steve Tusa with JPMorgan.
Hey, guys. Good morning.
Good morning, Steve.
I think with the lots of buzzwords, Rich, not used to you talking at that high of a level about corporate strategy. I think the message is that there's something a little bit more sustainable than just a couple of years of cost cuts. Noticeable to me was the 25%-35% incremental margin guide, then the 11%-13% of revenue and free cash flow in a year where you'll be growing pretty strongly. Basically, you should see some headwind. It shouldn't be like a great cash year, for example.
I think back in 2019, in the fall, you said 25%-30% incrementals and 8%-12% free cash as a percentage of sales. Are these sustainable step-ups that you'd hope to deliver over time as part of the earnings and cash algorithm?
Yeah, look, at the end of the day, we expect to be pulling on both levers: consistent margin expansion and cash flow productivity. Productivity in the working capital line. Bottom line is, as we've been saying all year, we would expect with the headwind that we'd be liquidating our balance sheet as we should in a difficult environment on the revenue side. We will have a working capital build because we've got a pretty robust revenue forecast going into 2021.
Do I think it's going to make our metrics worse? Not demonstrably so, because I think that we're going to get the benefit of the margin expansion, and I don't expect it to period at all in terms of working capital as a percent of sales.
I would guess that when I look at that 11%-13% of revenues, it's not like your CapEx is actually above what I would expect it to be. Is the $175-$200 now a sustainable run rate, or is that something that you push some projects out of 2020 into 2021? I think you guys were planning on that coming down a bit, that there were some temporary projects. What's the outlook for CapEx for the next couple of years?
Yeah. We've got two new transformational projects underway, one in Vehicle Service Group and one in ESG which, look, at the end of the day, they're not nearly the same scale of the new building that we did at CPC and what we did at DFR, but it's the same logic. It's automating what were pretty manual processes. I think that we're going to get a relatively quick payback in terms of the margin expansion there. It's early in the year. I think that we've tended to always forecast a higher CapEx number that actually gets delivered.
That number looks reasonable considering we've got two bigger projects. I don't want to take the number down right now or say it's an anomaly. Experience would say that it's probably a little bit high.
Right. If you do 11%-13% of revenue, even with that, it's not that bad. Just one quick one. You guys have talked about, I think, $25 million of temporary cost reversals as a headwind into 2021. Can you just give us an update on that number, if there's anything that's coming back relative to what you did last year to protect the margins?
There's nothing. At the end of the day, we've got estimates and building it back some incentive comp and a variety of other things. It's all built into the EPS forecast that we have there, whatever the pullback of. Let me answer you this way. We had coverage on furloughs. Okay? That was a positive this year because it deferred the cost of us having to take those people out to a certain extent.
You know what we're going to bring back is going to be absorbed into industrial production in the revenue line. Net net, that's an indifference. What we're talking about is general SG&A. The bigger movements there were T&E and incentive comp. Let's think positive for a moment. The incentive comp comes back. I think T&E is going to come back, but is it going to reach 2019 levels? No.
Right. Okay, great. Thanks a lot.
Thanks.
Our next question comes from the line of Andrew Kaplowitz with Citigroup.
Hey, good morning, guys.
Good morning.
Hi.
Rich, with the understanding that we don't want to get too far ahead of ourselves in DRFE, with the backlog that you have and the core food retail business picking up, as well as the Belvac deliveries ramping up, would you actually say that the high single-digit forecast for 2021 could even be conservative given the double-digit momentum you saw in Q4?
It could be a little bit early.
I said we don't want to get ahead of ourselves.
Yeah, let's get ahead of ourselves while we're not getting ahead of ourselves. Look, you know what? I think that the backlog is a good precursor for delivering the incremental margins, that we're looking for from a segment point of view. Our expectation, it's the highest growth segment in our forecast right now, and I'd have to go back to look because it's a margin differential, but it's a material contributor to the EPS expansion.
To the extent the trend continues, because this is a relatively short cycle business, if I just talking about refrigeration now and not Belvac. Belvac's booked for the year. If we get more orders for Belvac, that just gets pushed into 2022, quite frankly. DFR, which is generally a short cycle business, we're covered for Q1 and beginning to get into coverage into Q2. Let's get Q1 under our belt before we start moving the number up. A lot of the total profit change that we have baked into the EPS is coming from that segment, by the way.
The reason one, you could say, well, it's not overly aggressive in terms of the conversion rate. Remember, that's one of our lower margin businesses, so that's going to bring down the consolidated conversion a little bit, we'll take it in terms of absolute profits.
Mm-hmm. Very helpful. Then Rich, just in Engineered Products, maybe just give us a little more color into what happened in the quarter in Q4. I know you said it was just basically expected sales decline. Did you see any inflationary pressure in that segment in the quarter, and how are you thinking about the margin in that segment in 2021?
It's not inflation. I think that if you go back in Q3, the guys did a fantastic job in VSG of delivering off a backlog that had built during the quarter. The production performance there was very good. It actually fed into Q4 from a comparable point of view. That's not a problem there. ESG, the weak part of the market, which we've been talking about all year, is municipal. Generally speaking, municipal tends to get delivered at the end of the year, so we knew that they had a bad comp.
Having said that, look, at the end of the day, that segment is more of our industrial businesses, so that's where the raw mat headwinds are. Look, we're gonna have to work that out between volume price and productivity. I think, we fully expect portfolio-wide to offset all raw material headwinds.
Thanks, Rich. Appreciate it.
Thanks.
The next question will come from the line of John Inch with Gordon Haskett.
Thank you. Good morning, everyone. Good morning, Rich and Brad and Andrey. If the economy were to, Rich, really pick up starting, say, in the second half as let's presume the vaccine rollout is successful, are you geared to handle what could be a material upsurge in demand, or would you have to come up with a plan to sort of debottleneck or extend capacity or bring a bunch of people back? How would that work?
The only area that we've got real capacity constraint would be in a niche-y business like Belvac. The balance of the portfolio does not run on even five-day, three-shift operations, quite frankly. For the most part, we're a six-day-a-week single shift group here. To the extent that we have some amount of visibility, and to the extent that as economic activity ramps, that the supply chain keeps up with it, which it isn't right now, I don't think that we are capacity constrained in any meaningful way.
Having said that, in terms of top-line growth, I think that we're expecting economic activity to kind of sequentially ramp through 2021, even in our forecast. Are we capacity constrained outside of some of our niche-ier businesses? No.
No, that's fair. You just mentioned supply chain, by the way. Are you at a point where you're trying to circumvent this, or are you letting it ride to see how it happens? Meaning, I don't know, possibly seek other suppliers, dual sourcing, that sort of thing, or is it still sort of too early to tell?
No. We're doing everything under our power to get beyond this because whether that is buying raw materials forward, into the increasing curve on plate steel or sheet metal or something like that, which we're doing. We've been giving guidance to all of our operating companies, that from a working capital perspective, if they need to build at the beginning of the year and bleed it off in the second half of the year, we take the production performance and the efficiency of that rather than getting into stop, start kind of scenario.
There are a lot of the pinch points, forget kind of logistics with container freight and everything else. Some of the pinch points on electronic components, we're fighting it out with everybody else.
Okay. No, that makes sense. Maybe just lastly here, I'm actually really intrigued by the attention you put toward India business services and so forth, and deservedly so. If Dover were a substantially larger company, would efficiencies in the initiatives like the Dover Business Services exponentially compound?
You're not a huge company, right? If you were all of a sudden to do M&A and become a lot larger, would those benefits accrue at a compounded basis or perspectively at a linear basis? It's almost like, can these things that you're creating serve to create for mechanisms to justify why Dover should actually continue to expand into adjacencies to create shareholder value?
Look, the reason that we're doing it is, as we said all along, that Dover's reason to exist is to bring services at scale that our smaller companies would not be able to do on their own. Having said that, as we build those services, we're not even beginning to scratch the surface of the leverage that we get because the fact of the matter is, despite the robust trend in growth that we have, we're continuing to reinvest.
At a certain point, you've built enough scale that bringing on another 100,000 transactions doesn't require you to build out anything more. You flip over in terms of the benefit of that leverage. Having said that, we have a variety of conversations around here about being a compounder and doing something on the inorganic side. This is clearly an asset for us to extract synergy value of anything that we were to buy.
Makes sense. Thanks, Rich. Appreciate it.
The next question will come from the line of Scott Davis with Melius Research.
Great. Good morning, guys.
Scott.
Scott.
Rich, can you give us a little bit more color on retail fueling in China and just, are we still decelerating or are we kind of at a new normal demand level?
We're not-
We're getting feedback.
Can you hear me? Scott.
Try going on mute.
Okay. Okay. All right. Yeah, that works. Thanks, Andrey. I think this is the last bad comp for us, which was on that double wall issue. Having said that, the volume that we see out of primarily the NOCs in China has been pretty low. We had a big conversation around here the other day, whether that's because of, is the volume down and we're missing out on it, or is the volume just down?
We've gone out to all of our traditional customers in China. We still rate very well in terms of their purchasing programs. I just think that for whatever reason, that 2020 was a down cycle in terms of kind of the big NOC build-out of their retail operations. Early to say whether that recovers, and that's not really built into our forecast for 2021, but at some point it's gonna have to.
Okay. Fair enough. Just as a follow-up, you talked a little about inventories, it's hard to say, just given the diversity of your businesses, of course, are inventories back to normal, you would say, at the customer level? We've heard below trend line inventories for several quarters now. Are we back to normal with some double ordering?
Unfortunately, it's one of these it depends, Scott, answers. We have businesses like our industrial pumps business that sells through stocking distributors. Our early reads here in January is there's an amount of restocking going on because our backlogs in the industrial businesses there are building. The same thing with material handling. Those backlogs are building. I think it's fair to say that everybody was very prudent in terms of inventories on the distribution side in 2020.
Now everybody's trying to make two calls. What is economic activity going to be in 2021? This second thing I mentioned of if there are going to be supply constraints as everybody ramps sequentially, do I got to get on the front foot and get my orders in because there's potential that some of those deliveries are going to be delayed outside of the quarter.
There's really two of those phenomenons going on. Do I think that they're severely understocked? No. I think that by and large, our stocking distributors are going to stock based on what they think that the revenue is gonna be, and then which is built into our forecast.
Okay. Good luck, guys. Thank you.
Thanks.
The next question will come from the line of Julian Mitchell with Barclays.
Hi. Good morning. Maybe just a first question around any margin color by segment that you can give. I see the 25%-35% guide firm-wide on incremental margins. Any segments to call out at being at extreme ends of that spectrum? Maybe just to find a point in DFS, should we expect operating margins to grow this year or that might be a challenge because of the EMV mix headwind?
Huh. There is plurality in terms of incremental margin, with the exception of Engineered Products, which will be slightly lower. Let's discuss why, right? The Engineered Products is going to be slightly lower just because of the gross margin within that segment. Despite the fact that DRFE has lower gross margins at the segmental level, the revenue growth there is so high that you're getting a pretty big impact in terms of absorption benefit year-over-year.
Now having said that, we do have structural cost savings that are rolling through at the same time. That depends segment by segment, but I think that my comments here are, I think you've got your finger on it for DFS, because it's a relatively low growth environment, and it is a little bit negative because of the mix. But w e think that we can make that up in terms of productivity. The hierarchy would be Engineered Products the lowest, and then plurality again across the rest of the portfolio.
Great. Thank you. I see the full year guide across the firm. Just wondered, perhaps the first quarter, maybe just talk about orders and bookings in recent weeks? Should we expect the first quarter to look maybe a little better than Q4 in terms of year-on-year revenue and margin, but not substantially different until Q2?
I think the answer is yes, but that is a calculation that I have not done around here. I can just tell you that what you would expect is the toughest comp is Q1- Q1, just because it's pre-pandemic to entering into 2021. We expect it to be better vis-a-vis Q1. Clearly, Q2 comp is going to be a relatively low bar to hurdle.
The back end of the year is going to be, as we mentioned during the color on the segments, that we have certain businesses that we believe are back end loaded. Either because of seasonality or based on where they are in the recovery of those markets. We expect to be better in Q1. Everybody's going to be better in Q2. Regular seasonality from there.
Mm-hmm. Great. Thank you.
Thanks.
The next question will come from the line of Andrew Obin with Bank of America.
Yes, good morning.
Hi.
Rich, Brad, Andrey. Good morning.
Morning.
Just a question. You're definitely sort of starting to fire on all cylinders when it comes to operational storage and starting to deliver consistently on the operational algorithm. Can we just talk about how is your strategy on capital allocation and specifically M&A is evolving going forward, and what kind of opportunities should we be thinking for 2021, and what's out there in terms of availability?
I think that the hierarchy, we've been over a variety of different times, so that's unchanged. I think in terms of opportunity, there's plenty out there, and a lot of it's very expensive for all the reasons that we've talked about. We're on the front foot. We actually spent more. If you go, I don't know what the slide number was, we spent more in 2020 versus 2019.
That's exactly right.
Yeah. We tried to spend a lot more than that.
Yeah. We tried.
Quite frankly. Couldn't get it done because of valuation or a variety of different things. Look, I'm very confident in, as you described it, the operational algorithm here. I think that this is just a roll forward of what we've done for the last couple of years. Our confidence of converting revenue into incremental margin is quite high. I think that we have a lot of businesses that have earned the right to grow inorganically. We just got to find the targets and execute on them without getting crazy.
Got you. Just to follow up, I think John has asked you about the supply chain, how has your thinking about the supply chain has evolved throughout the COVID sort of pandemic? You managed it very well, anything different that you guys are going to do going forward in terms of where you're sourcing? I know it's sort of extension of John's question, maybe more color.
Look, our supply chains are relatively discrete. Any moves that we make, we're not an auto OEM that have to make big strategic decisions based on geopolitics and foreign currency and things like that. We're changing it all the time, to a certain extent. I think that the trade of buying low value, high commodity price exposure, basic metal working out of Asia and bringing it back to the U.S., I think that that has been dying for a couple of years now.
It's part and parcel to the reason that we're making some investments into VSG and ESG right now because we think that we can be more competitive and get the industrial absorption of doing it ourselves to a certain extent. We're not making big strategic decisions and not making big swings, but we're always trying to adapt the supply chain.
Thank you very much.
Welcome.
The next question comes from the line of Joe Ritchie with Goldman Sachs.
Thanks. Good morning, guys.
Morning.
Morning.
Hey, Rich, maybe following on that last question, your comments around being front-footed on M&A. Maybe just the flip side of that argument, is it like, given where valuation levels are right now, you could argue maybe there hasn't been a better time to look at your portfolio closer, in terms of maybe unlocking value on asset sets you don't expect to be part of the portfolio longer term. Maybe just some thoughts on that and how you're thinking about that specifically for 2021.
Joe, it's not changed. We're constantly revisiting a variety of pieces of the portfolio. That's really all I can say about it at the end of the day, right? We may have views on individual pieces, but we don't want that to get in the way of us extracting the maximum value that we can out of the pieces that we have. It's been a lot of time here in terms of portfolio construction on both in more on the in than in the out. We screen all of our businesses for their participation strategy and changes in the marketplace and everything else.
Not so much, "Hey, wait a minute, everybody's paying a lot for things, so maybe we should go to market." We look at it more as in terms of its hierarchy, in terms of return on invested capital in the group, and whether they are advantaged or disadvantaged structurally over the next time horizon.
That makes sense, Rich. I don't mean this to be a perfect segue, but I did want to talk about food retail to some degree. You talked last quarter about the fact that margins had gotten back to the low teens. Remodeling had restarted. I guess, how do we take the comments around backlog and whether that backlog is building because it's been potentially more difficult to continue on the remodeling at this point, given the coronavirus cases surging?
I just want to get a better understanding for whether you're getting on-premise access and then secondly, how the margins have kind of even trended even beyond the third quarter for the food retail business specifically.
Yeah. We're expecting big things from the retail food business this year. For sure, a lot of the deferments that happened because of COVID access and a variety of other forces are clearly what's building the backlog into 2021. Having said that, we've gone through four and a half, close to five-year cycle, where there hasn't been even, we would argue, replacement or maintenance spending in terms of global food retail. There is some pent-up demand there. We think that we have a more competitive product now.
We're changing the cost structure of that product. As we talked about before, our view is that what the customers really value in this business is being able to have the product available when they want it, and to the extent that now we've changed or changing the dynamic of our lead times.
I think that's beginning to be reflected in our backlog. The management team of this business has spent two and a half years working real hard to transform this business, and our expectations in terms of profitability this year is material in terms of what's baked into our EPS.
Well, yeah, congrats on that. It will be nice to see. Thanks, guys.