Good morning, and welcome to Dover's Third Quarter 2020 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer Brad Serapak, Senior Vice President and Chief Financial Officer and Andre Galiuk, Vice President of Corporate Development and Investor Relations. After the speakers' remarks, there will be a question and answer period. As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call.
If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Andre Galiuk. Please go ahead, sir.
Thank you, Laurie. Good morning, everyone, and thank you for joining our call. This call will be available for playback and the audio portion of this call will be archived on our website for 3 months. Dover provides non GAAP The 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-nineteen on the global economy and our customers, suppliers, employees, operations, business, liquidity and cash flow.
We caution everyone to be guided in their analysis of Dover by referring to our Form 10 ks and Form 10 Q for the 3rd quarter for a list factors that could cause our results to differ from those anticipated in any forward looking statement. We undertake no obligation to publicly update or revise any forward looking statements, except as required by law. With that, I will turn this call over to Rich.
Thanks, Andre. Let's begin with the summary results on Page 3. As we guided back in September, July, August trends were positive and we were exceeding our internal forecasts. This dynamic continued through September. In addition to the improving demand environment, we were very encouraged by our manufacturing operations and supply chain performance in the quarter.
The solid operation execution had 2 tangible benefits in Q3. First, it increased our capacity to deliver higher volume than expected from the backlog in our long cycle businesses and as you see, the positive impact to the top line. And second, through a combination mixed sequentially across most of the portfolio. The trajectory continues to vary by market and I'll talk more about that, but our diverse end market and geographic exposure is clearly an asset to us in the downturn. Revenue declined 5% organically and bookings were flat with a third of our operating companies posting positive year over year bookings for the quarter and more than half posting positive comparable growth in the month of September.
We are not out of the woods yet, but the trajectory is encouraging, and we continue to carry a healthy backlog going to the Q4 and into next year. We delivered strong margin performance in the quarter year to date. We achieved margin improvement in the quarter despite lower revenue driven by our operational multi year efficiency initiatives gaining further traction and by improved business mix, some of which we highlighted at our recent Investment Day focused on the pumps and process solutions segment and biopharma business in particular. With the strong results to date, we expected to over deliver on our full year conversion margin target and are now driving towards achieving a flat consolidated adjusted operating margin for the year. Cash flow in the quarter was strong at 17% of revenue and 127% of adjusted net earnings.
Year to date, we have generated $117,000,000 more in free cash flow over the comparable period to last year, owing to a robust conversion management and capital discipline. As a result of our performance in the 1st 3 quarters of the year and a solid order backlog, we are raising our annual adjusted EPS guidance dollars to $5.45 per share. We are not in the clear on the macro backdrop and performance remains uneven between markets, but we believe that our performance to date and the levers we have in our possession will enable us to absorb any possible dislocations in the 4th quarter industrial capital spending remained subdued in Q3, resulting in a 10% organic decline for an engineered products driven by softness in CapEx levered industrial automation, industrial winches and waste handling. Additionally, our waste handling business had the largest quarter ever in the comparable period last year, making it a challenging benchmark. On the positive side, aerospace and defense grew double digits on shipments from a strong backlog and we've seen robust recovery in our vehicle aftermarket business after a difficult couple of quarters.
Productivity actions, cost actions and favorable mix minimized margin erosion in the quarter, nearly offsetting the impact of materially lower volumes. In fueling solutions, saw continued, albeit sequentially slower growth in above ground equipment in North America on EMV compliance and regulatory activity, whereas national oil companies in China continued to defer capital spending amidst ongoing uncertainty. Demand for below ground equipment has improved sequentially activity restarted but remains subdued globally. And in China, we're still weathering the roll off of the double wall replacement mandate. Margin performance in the segment was very good and a testament to the operational focus and capability of the management team and is achieved through productivity improvements, cost controls and favorable regional mix more than offsetting volume under absorption.
Sales in imaging and identification declined 8% organically due to continued weakness in digital textile printing. We've seen improving demand for textile printing consumables, reflecting recovering in printing volumes, however, has been insufficient to prompt fabric printers to invest in new machinery, we expect conditions to remain challenged for the balance of the year. Marking and Coating was flat on strong demand for consumables and overall healthy activity in the U. S. And Asia despite lingering difficulties with customer site access and service delivery.
Despite segment margins being down relative to the comparable quarter, driven by digital printing volume and fixed cost absorption margin improved in marketing coding on flat revenue as a result of the mix of effect on consumables and operational initiatives undertaken in prior periods, which also provide a solid base for incremental margins in 2021 as textiles recover. Pumps and Process Solutions continued to demonstrate the resilience of its product portfolio, some of which we highlighted last month's Analyst and Investor Day. Strong growth continued in biopharma, medical and hygienic applications. Plastics and Polymers shipped several large orders from its backlog, which were initially slated to ship in Q4, getting it to a slightly positive revenue performance year to date. Compression components and aftermarket continue to be slow and weaker activity in U.
S. Upstream and midstream. Industrial pumps activity remained below last year's volumes, but has improved sequentially. This was another quarter of exemplary margin performance in the segment with more than 300 basis points of margin expansion driven by broad based productivity efforts, cost controlled and impacted businesses, favorable mix in pricing, which more than offset lower volume in some of the portfolio. Refrigeration and Food Equipment posted its 1st quarterly organic growth since early 2019, which is a welcome sign in line what we saw exiting the 2nd quarter.
Moreover, the recovery was broad based. Our food retail business, the largest in the segment, grew organically and restarted remodeling activity in supermarkets. Belvac, our can making business, began shipping against its record backlog, which we believe is in the early innings of a secular growth trend. Heat exchanges were approximately flat with continued weakness in HVAC offset by strength in residential and industrial applications, including semiconductor server and medical cooling. Commercial food service improved, but margins remain impacted due to continued weakness in institutional demand from schools and similar venues, while activity in large chains has slowly recovered.
Cost actions taken earlier this year as well as improved efficiency and volume more than offset the demand headwinds in food equipment, resulting in appreciable margin accretion. We expect to continue delivering improved comparable profits in this segment in line with our longer term turnaround plan. I'll pass it to Brad from here.
Thanks, Rich. Good morning, everyone. Let's go to Slide 5. On the top is the revenue bridge. As Rich mentioned in his opening remarks, our top line continues its recovery, with each segment posting sequential improvement over Q2.
Several of our businesses, including plastics and polymers, beverage can making and food retail, returned to positive organic growth in the 3rd quarter, while biopharma continued its strong growth trajectory from prior quarters. FX, which had been a net revenue headwind for us since mid-twenty 18, flipped in the quarter and benefited top by 1% or $12,000,000 driven principally by strengthening of the euro against the dollar. Acquisitions more than offset dispositions in the quarter by $3,000,000 We expect this number to grow in subsequent quarters. The revenue breakdown by geographic area reflects sequential improvement in each major geography, but particularly encouraging is the trajectory in North America and Europe. The U.
S, our largest market, declined by 4% organically due to softness in waste handling, industrial winches and precision components, partially offset by a strong quarter in our above ground retail fueling, marketing and coding, beverage can making and food retail businesses, among others. Europe declined by 4% organically, a material improvement compared to a 19% decline in Q2 driven by constructive activity in our pumps, biopharma and hygienic and plastics and polymer businesses. All of Asia declined 10% organically, while China, representing approximately half of our business in Asia, posted an 8% year over year decline. We continue to face headwinds in China in retail fueling due to the expiration of the underground equipment replacement mandate and slower demand from the local national oil base. Outside of retail fueling, we saw solid growth in China.
Moving to the bottom of the page. Bookings were nearly flat, down 1% organically year over year compared to a 21% decline in Q2, reflecting continued momentum across our businesses. In the quarter, we saw organic declines across 4 segments, but sequential improvement across all segments and a particularly strong booking for our Refrigeration and Food Equipment segment, driven primarily by record order intake in our can making business. These orders relate to large projects that are mostly projected to ship in 2021 2022. Overall, our backlog is currently approximately $200,000,000 or 14% higher compared to this time last year, positioning us well for the remainder of the year and into 2021.
Note that a material portion of the backlog increase was driven by orders in our can making business, which I mentioned above. Let's go to the earnings bridges on Slide 6. On the top of the chart, despite a $77,000,000 revenue decline in the quarter, we were able to keep our adjusted segment earnings approximately flat year over year, a testament to our proactive cost containment and productivity initiatives that help drive 100 basis points of adjusted EBITDA margin improvement. Some of the recent initiatives will continue supporting margins into 2021. Going to the bottom chart.
Adjusted net earnings declined by $3,000,000 principally driven by higher corporate costs related to deal fees and expense accruals, partially offset by lower interest expense and lower taxes on lower earnings. The effective tax rate, excluding discrete tax benefits, is approximately 21.5 percent for the quarter, substantially the same as the prior year. Discrete tax benefits quarter over quarter were approximately $2,000,000 lower in 2020. Rightsizing and other costs were $6,000,000 in the quarter, relating to several new permanent cost containment initiatives that we pulled forward into this year. Now on Slide 7.
We are pleased with the cash performance with year to date free cash flow of $563,000,000 a $117,000,000 or $20,000,000 for last year. Our teams have done a good job managing capital more actively in this uncertain environment. And with the improving sequential revenue trajectory in the Q3, we rebuilt some working capital to support the businesses and our customers. Free cash flow now stands at 11.5% of revenue year to date. Going into the Q4, which is traditionally which traditionally has been our strongest cash flow quarter of the year.
With that, let me turn it back to Rich.
Thanks, Brad. I'm on Page 8. Let's go segment by segment. In Engineered Products, we accept similar performance as the Q3. Vehicle aftermarket had a very good Q3 as the business was able to deliver on pent up demand.
Notably, we have a tough comp in Q4 due to some promotional campaigns, but this is a business which has excellent prospects for 2021. Activity in waste handling is picking up with private haulers, but orders placed are mostly for 2021. We expect municipal volume to remain subdued for the balance of the year. Demand is reaccelerating for digital solutions in this space, and overall, we are constructive on the outlook for this business into 2021. We are seeing some encouraging signs in industrial automation and automotive OEM markets, in particular, in October.
Aerospace and Defense continues to be steady. Most of what we plan to deliver in the next quarter is in the segment's backlogs. We don't expect material upside and or downside from our forecast. We expect margins to be modestly impacted by volume and negative mix relative to Q3 largely due to demand seasonality. Fueling Solutions remained constructive finishing the year and into 2021.
As we've been guiding all year, we have a tough comp in Q4 due to record volumes in the comparable period. Despite the top line headwinds, we expect to hold year over year absolute adjusted operating profit as a result of our efforts done on product line harmonization, productivity and pricing discipline. We expect 2021 to be a good year as demand trends remain constructive for our aboveground and software solution businesses and we turned the corner on belowground fluid transfer and vehicle wash. Imaging and ID should remain steady. We saw robust activity in marking and coding exiting the Q3 and the backlog in the business is higher than last year.
Activity in serialization software space is also picking up nicely. In digital print, demand for inks has picked up, which is a sign of improving printing volumes. We are seeing a pickup in quotations for new machines, but we expect a few more quarters before we return to normal levels in this market. In pumps and process solutions, we expect current trends to continue, biopharma, plastics and processing continuing a robust trajectory and pumps recovering to more normal levels, particularly in defense and select industrial applications. Compression product lines within the precision components exposed to mid and downstream are likely to see continued weakness in Q4 as projects and maintenance continue to be deferred.
Overall, the pumps and process solutions outlook is supported by segment backlog that is in line with what we had at this point last year. Let's get on to the last segment, Refrigeration and Food Equipment. First, as I said, we were in the early innings, what we believe to be a multiyear secular build out of can making capacity as evidenced by our backlog, driven by the transition from plastic to aluminum containers and also the spike in demand for cans at home consumption of food and beverages. In Food Retail, we delivered low teens margin for Q3 converting on our backlog, providing us a baseline to reach our 2021 margin aspirations. Our backlog is beginning to build moving into 2021.
As you all know, this is a seasonal business, so Q4 volume and fixed cost absorption declines in Q4. And frankly, it's all about 2021 from here, and Q3 was a sign of good progress. We have a robust backlog in heat exchanges and are constructive in this market. Our capacity expansion projects are being completed, and we have some interesting new products in the pipe. Finally, in commercial foodservice, large chain should continue to support activity but will not fully offset weakness on the institutional side.
Overall for the segment, comparable profits and margins for the segment are forecast to be up in Q4 into the comparable period. With strong margin performance to date, we intend to deliver approximately flat year over year adjusted margin this year despite a lower revenue base. As you may recall, we entered the year with a program entailing $50,000,000 in structural cost reductions as part of a multiyear program highlighted at our 2019 Investor Day. We actioned more structural initiatives, which resulted in approximately $75,000,000 of permanent cost reduction in 2020, leaving a $25,000,000 annualized carryover benefit into 2021. We view this as a down payment on the 2021 portion of our multiyear margin improvement journey, and we'll update that with more to come on 20 21 when we report the Q4.
We expect robust cash flow this year on the back of solid year to date cash flow generation and target free cash flow margin at the upper end of our guidance between 11% to 12%. Capital expenditures should tally up to approximately $150,000,000 for the year with most of the larger outlays behind us. In summation, we are raising our adjusted EPS guidance to $5.40 to 5.45 dollars per share for the full year, above the top end range of our prior guidance. We remain on the front foot in capital deployment posture with several bolt ons closed last quarter. We have a multiple opportunities in the hopper and we hope to report on those soon.
And as usual, before wrapping up, I want to thank everybody at Dover for their work and continued perseverance in these uneasy times. And with that, Andre, let's go to the Q and A.
Thank Our first question comes from the line of Steve Tusa of JPMorgan.
Hey, guys. Good morning.
Hi, Steve. Thanks, Steve.
Just trying to reconcile the kind of 4Q guide here. I mean, I didn't really hear when you walked through the segments, there wasn't really anything that suggested that any one of these segments or at least in total are going to be down materially year over year. Yet I think your 4Q guide implies a decline in EPS. And I understand tax rate is going to be a little bit higher, maybe that's like $0.07 or $0.08 But is there anything that we're missing there? I mean, refrigeration is usually the most seasonal and the backlog there was like pretty eye poppingly strong.
So anything we're missing? Or is this just a bit of conservatism?
Well, I would have hoped that when we did the Investor Day in the middle of the quarter that we were pretty forthright of what we thought the Q3 was going to be and we would have hoped that estimates for Q3 would have moved up and that Q4 would have moved down and we've gotten either. So here comes the Q3 is great, but Q4 is going to be a miss, a narrative. Look, I think we're going to tell the
That's not from me, just to be clear.
No, no, no. That was a general comment. That was not aimed at you at all. So look, we have a bad comp in BFS, which we've been highlighting all year just because of the fact that if you recall, we had a bunch of orders last year. We had some operational issues in the Q3, so we shipped a ton in Q4.
That's always been hanging out there. We over delivered to our this year's forecast in vehicle services group, which is a lot of the reason that we did a lot better in Q3. So if you think about automotive aftermarket, we had a couple of really poor quarters. We had a lot of pent up demand. I think operationally, we hit the ball out of the park and delivered and over delivered what we'd expect backlog in Refrigeration, I think I would caution you on the segment backlog, while we're building backlog in Refrigeration for 'twenty one deliveries, that backlog figure is materially impacted by the backlog that we have at Belvac, which is over $200,000,000 worth of deliveries.
So and finally, we're still getting COVID reports, particularly in Europe. So I think there is an amount of prudence about, are we going to have to take facilities down? Are certain regions of Europe going to be impacted from a demand cycle? So I don't think it's bad news at all, Quite frankly, in some of our higher CapEx businesses like Waste Management, we're getting orders for 2021. Clearly, we could build that product and get the industrial absorption, but I've got absolute confidence in our management team that let's manage our inventory in Q4 and we start up next year with high build rates.
So overall, is there some conservatism in there? Sure, there is. And that's until we get on the other side of this COVID issue, we'll continue to operate under that stance. But is there anything going on in terms of any particular market getting worse from the trajectory that it's on now? Absolutely not.
Yes. Just a specific follow-up on that. I think you said hold year over year absolute profit in your comments at DFS for 4Q. Does that mean that's flat? Or was that just, hey, we'll hold it within a range?
And then just to be clear on Belvac, is that still a pretty profitable business?
The absolute profit comment was for the full year of DFS. So margin benefit outweighs top line decrease.
Okay.
And on Belvac, it is accretive to the segment margins. We are beginning to do a transition to a higher mix of turnkey projects. So there's some pass through revenue. So I think I made a little bit careful about the assumptions of Belvac, but we'll take it because, quite frankly, it's accretive to the segment for sure.
Right. Okay. That's it. Thanks a lot. Thanks.
Your next question comes from the line of Scott Davis of Melius Research.
Hi. Good morning, guys.
Hey, Scott.
Rich, you didn't talk about M and A markets at all in your prepared remarks. I just wonder if there's any bit of an update on either activity out there that you're seeing or opportunities or valuation or anything that you might share with us?
It's not a lot different than it was at the end of Q2. I mean, there are some opportunities out there. Valuation continues to be reflective of the public markets. So despite even private companies are trying to see through the downturn of 2020 and want to be paid on 2021. So it's pricey out there.
A lot of competition in terms of private equity. But having said all that, on some of the more niche opportunities that we have, We're feeling good about some of those opportunities there, some of which we highlighted during the Pumps and Process Solutions Day that we did mid month. So we've got a pretty good list of candidates, but we're not going to overpay. And I think that some of these deals are taking longer because, as you can imagine, due diligence under pandemic is
a bit difficult. I'm sure it is. So just moving on, kind of curious on your opinion on capital spending. There's a lot of uncertainty out there. You've got an election, you've got a pandemic that obviously in the middle of.
But at the same time, money is cheap and no better time to invest ahead of a recovery, I suppose. So are your customers delaying capital spending? Is this kind of a normal down cycle response and we'll see a quick recovery? Or do you think there's any sense that things could be a little bit different and people delay a little bit further just given perhaps higher corporate tax rates and other noise that's out there?
Look, I guess my overall comment is there's a bit of seasonality, and I'm just not going to do the project in Q4 because I can do it in Q1 of next year. The general commentary, if I exclude kind of some of our businesses like textile digital print, which has some secular headwinds associated with it, which are particular. What we're hearing from our customers is a desire to spend in 2021 on productivity CapEx, which generally speaking is makes up about 85% of our portfolio. So going into 2021, as you can imagine, we're beginning to start to do the forecasting and the budget. We feel good about a lot of our businesses.
I think like if you take something like waste handling right now, the municipalities are going to sit on their hands now until they see what their budgets are for 2021. But on the private sector, we just think that we could build off our backlog now if we want, but I don't think there's any reason to do so and we'll hold our powder dry, manage our working capital and come out at the beginning of the year at high build rates.
Okay. Thank you, Rich. Good luck.
Thanks. Your next question comes from Jeff Sprague of Vertical Research.
Thank you. Good morning, everyone.
Hey, Jeff. Hey,
two things, Rich. First on pumps, I mean, the margins were extraordinary. You mentioned a little bit of, I think, revenue pulled forward. Was there some kind of additional mix or volume dynamic there? And how should we think about the margins in this segment going forward?
Yes. I
I think we're
going to have to be careful about promising margin accretion from here. I guess we just take it in absolute revenue growth. But look, my comments on the quarter was on the long cycle side, which is particularly MOG, timing those revenues is always difficult because of the size of the orders and you're dealing with letters of credits and a variety of things. But my opening commentary, as a general statement, I think that the operational performance of the group in Q3 was excellent. I think that we're really beginning to get some traction and this is across the portfolio in terms of what we've been working on, on operational efficiency and supply chain.
And look, MOG built the product. It was ready to go and we were paid and out the door it goes. So and that, generally speaking, is margin accretive and you couple that with the fact that the trajectory on the biopharma side continues on and you get the margin performance that you see here.
Interesting. And then maybe a 2 parter on DRFE, if I could, actually. So we're seeing actually very strong results out of some of the food retailers, Albertsons today, actually. Is there any particular unusual issue with access at this point? Obviously, we've got seasonality, but how do you see that playing out?
And then just a little bit more on Belvac. Are you just seeing kind of, I don't know, kind of conceptually, I guess, the switch being flipped on plastic to aluminum, does something really dramatically change in the thinking of your customer base here?
Sure. Let's deal with Belvac first. I'll flip the answer. Capacity has been extremely tight. It was tight in 2019 and then COVID flipped it over in terms of the demand function.
Think about beer, right? No one's consuming keg beer. It's all flipped into cans. So there's been a surge in terms of can demand. And if you go look at some of the bottlers, they've been bitching about can pricing for some time.
So here comes the capacity wave. These are big projects. So the planning period to get them up and going. We've known about them coming, I would say, for a year now, but I think that COVID really drove the demand. So you've got the COVID issue in terms of the transition to kind of more at home, if you will.
Overarching all that, you have this issue with PET and recyclability and a variety of other things. So that's why you've got a pull forward in terms of this massive capacity expansion being announced, which is driven by the shorter term demand cycle. But I think that the can makers would tell you that they believe it's secular because they think that they have an advantage from an environmental point of view. So for us, we think that this is 2 to 3 years minimum in terms of the secular trend for us, in particular, on the machinery side. Back to Refrigeration.
Look, we expected this year to be better. I know it's a low bar in terms of the demand function, and we got negatively impacted by COVID because of access rights and everything else. We ran a capacity in Q3. As I mentioned in my comments, we did low teens margin for the refrigeration piece of the business, which is a good harbinger in terms of what we're capable of doing level loaded. Q4, it's all about there's a seasonality portion of this business.
You generally don't do store refurbishments going into the Christmas season because I think it's going to be a stay at home Christmas clearly. So they're going to protect their infrastructure. But we are beginning to build a backlog for 'twenty one delivery now. So you'll see some under absorption in Q4. But as I mentioned in my comments, it's all about 'twenty one for us here.
Great. Thanks.
Your next question comes from the line of Julian Mitchell of Barclays.
Hi, good morning. You mentioned, just now Rich, it's all about 2021 and fully agree. Maybe on that point, Slide 9, I suppose, you gave a little bit of color on the cost savings and that €25,000,000 carryover into next year. Just clarify perhaps that there will be extra cost saving measures on top of that, that we probably hear about at Q4 earnings. And also, any way to size the return of some of those temporary cost outs that are not semi permanent, Just to try and understand any magnitude on that for next year.
To your first question, we said that we were going to it was a 3 year program of $50,000,000 a year. We've pulled forward $20,000,000 to $25,000,000 into this year, so you get a calendarized carryover. But the fact of the matter is we've got enough in the pipe that we're confident that we'll get the $50,000,000 and to the extent that we can work hard on it, we'll get kind of the roll forward of the calendarization carry forward in 'twenty one. That's what I can say about in terms of absolute structural cost takeout. On the temporary side, I think that we need to be careful because a lot of the temporary was based under furlough legislation that was available, okay?
And that is going to be dependent on revenue and volume. So let's kind of put that aside for a moment. The rest of what we can call temporary or controllable is in the SG and A side. Look, at the end of the day, we would hope to build back comp, so that's a headwind. But I think that's important for morale around here.
But on the other hand, clearly, on T and E and some of the other things, I do not expect us to come back to 2019 levels no matter what the revenue profile is for 'twenty one. So look, at the end of the day, Julien, it's going to be embedded in whatever guidance we give you '21, but we don't expect a full snap back to kind of 2019 comp SG and A levels.
I understand. And anything, Rich, you could remind us on around kind of normal operating leverage that we should expect at Dover, assuming next year revenues are up but not dramatically, let's say?
Yes. It's look, we have a wide range of margin profiles between the businesses. And depending on what the starting point is, then the leverage is going to be different. So you heard the question before about pumps and process solution. I think it's fair to say that you're not going to get a lot of fixed cost absorption out of that particular segment, but any revenue that we get at current gross margins is going to be highly accretive.
So we look at it that way for that particular business as opposed to digital textile printing where you've had a very difficult time this year. We think that the operational leverage when that comes back is going to be in excess of gross margin level. So it's a bit of a mixed bag depending on the current trajectory between 2020 2021.
That makes sense. And maybe just on the revenue line then for next year. DFS, I think you'd mentioned a good outlook for next year. But I suppose the bookings have been tough for 2 quarters, probably tough again in Q4. And you have those question marks around U.
S. EMV that always get brought up. So maybe don't focus too much on that specific piece, but maybe help remind us why you feel good about the DFS top line next year?
I'm glad you asked that question because as we mentioned, we did when we did the Investor Day for pumps and process solutions that we were going to do another one this year. We will be announcing shortly another virtual day, which we will concentrate on the fueling solutions business and hopefully answer all your questions about '21 trajectory and what we think the strengths of that business is. Understood. Thank you. Thanks.
Your next question comes from Andy Kaplowitz of Citigroup.
Hey, good morning, guys.
Good morning. Andy.
Rich, can you give us more color into the progress you've been making in Refrigeration in terms of margin? At one point before the pandemic, you talked about hitting that 15%. You did have double digit margin in the quarter for the first time in over a year. But looking out into 2021, have you seen enough from them in terms of execution in that segment? What you have in backlog, you talked about Belvac.
So you get continued sort of nice margin improvement and you can hit those goals that you set for yourself?
We're not all the way there yet. We're not getting the benefits of the automation in terms of the labor content. So we actually got to low teens margin in the quarter without that. So everything is pointing up. I think it is purely going to be a function of the demand profile of the business for 'twenty one.
What we can see right now and what we hear from our customer think it's going to be proactive for 'twenty one. So meaning it looks like barring another wave of COVID that revenue should rise for refrigeration next year, and we'll get the benefit of both the productivity and the operational leverage. So we're not it's not all in the bag yet, but we're cautiously optimistic based on what we've seen in Q3. And I would not panic about Q4, just because of the negative leverage that we're always going to get in that segment. Like I said, it's all about 'twenty one from here.
Got it. And then, Rich, you mentioned you're going to have that DFS Analyst Day. But if you step back, I mean, you have 14% backlog growth, as you mentioned. You sound pretty constructive about 2021. So as you look out, are there any businesses other than DFS that you're more worried about?
Or do you actually have pretty good backlog visibility at this point, maybe even better than average toward growth in most of your segments in 2021?
We worry about them all. But I think I mentioned a few. I think that we've been proactively prudent in ESG by cutting capacity early just because of this municipal issue. So we would expect to carry some negative leverage from 'twenty into positive leverage in 'twenty one. We feel really good about Vehicle Services Group for 'twenty one based on mostly the amount of miles driven, the amount of used cars that are out in the fleet.
And I think that management has got a lot of really great productivity initiatives in the Let's see. Let's see. I mean, I don't want to go through them all 1 by 1. Refrigeration, we talked about we'll be cautious on digital printing. That's probably going to be a second half of 2021 in terms of the upturn.
And look at if pumps and process solutions just can continue the trajectory that they're on, that is absolutely satisfactory. So we're not out of the woods. We've got some business in terms that are highly leveraged towards CapEx. It's a little bit of a wait and see, but we're in the process of doing 'twenty one forecasts, and we feel good about the demand function and we feel good about the rollover of our productivity initiatives going into next year.
Appreciate it, guys. Thanks.
Your next question comes from the line of John Inch of Gordon Haskett.
Thank you. Good morning, everyone. Hey, Rich, picking up on the answer on Refrigeration. So kind of went back over some notes here. I think originally you had said the food retail automation project was going to reduce labor hours by 50%.
You're going to cut SKUs from 400 to less than 100. You're talking about dramatic declines in base permutations. Have those objectives been realized? And you mentioned that the 50% labor wasn't really necessarily in that. So does that mean that that's on the come because it's a matter of timing or perhaps the parameters for expectations or cost out or whatever change?
Just any kind of more color on that automation project would be
slightly behind in terms of the automation just because we couldn't get contractor access for a period of time into our sites. So that kind of gummed up the process a little bit. We're making good progress in terms of SKU management, but that is also a function of the demand cycle and somewhat a function of us getting the automation up because you need to kind of sell the benefits of the automation to your customer because those are the ones that you're convincing to change the SKUs at the end of the day. So look, I think that we're probably taking Q3 into account, we're halfway where we would expect it to have been under a more normal 2020 conditions. I guess I can answer it that way.
No, that makes sense. Do you assuming that the demand trajectory continues, where do you get to the point where you say, all right, automation is done and now you're getting the full bore of the cost benefit or the productivity drivers towards say variable contribution from future volume uplift? Is that sometime mid next year
or perhaps over the year?
It would be this is it's a bit of a reverse barbell. So it would be Q2 and Q3 of 2021 where we would expect to see the tangible benefits.
Okay. And then I did want to ask you about Wayne Tokheim. VonTier just went public and they talked about 2020 is the peak year for EMV. You talked about EMV being strong this quarter as they did. I'm curious if you would concur with that.
So 2021 is an absolute revenue drop off. And strategically, is Wayne Tocheim considering, say, branching into electric vehicle infrastructure to diversify the petroleum footprint to a greater extent? I know you've got this alliance with ChargePoint. It doesn't look like there's a revenue or profit sharing mechanism with that. But what are your thoughts, Rich, just strategically on and I realize EV is very far out, but markets discount this stuff and worry about it sooner versus later.
Like how are you thinking about it?
John, I don't want to take away from all of the effort that the management team is undertaking right now to prepare for this Investor Day in November, which should answer all of the questions that you just asked. I think that the only thing that I will say that there was some talk about sizing the headwind for 'twenty one. I would caution you that EMV is a North American phenomenon and our exposure in terms of the North American market is different. Than so I think you have to size that appropriately and that our product mix between aboveground and belowground is significantly different. We've been carrying around a pretty weak belowground market this year, right?
We had talked about the headwind of double wall for China when we give the guidance of this year, but then you ran into COVID with access rights and construction and everything else. So So at the end of the day, sure, margins are up. Some of that is driven by EMV demand for sure, but I don't want to take away from the productivity improvement that the management has done here that has driven margin accretion despite the top line. So what our thoughts are in 'twenty one, and I'll leave it to November when we get to it, is that the EMV headwind is manageable to the extent that the below ground business returns to growth in 'twenty one.
Perfect. And I'll leave the EV stuff for the Investor Day. Thanks again.
Thank you.
Your next question comes from Andrew Obin of Bank of America.
Hi, good morning. Hi, Andrew.
Just a question, Matt. It's sort of been asked in different format, but how do you think of the businesses that are doing well, how much will be sustainable in 2021? But just trying to see as things normalize, do you think businesses mean revert, I. E. Things have been doing well during COVID sort of get a little bit weaker and things that were weak get stronger?
Or do you see structural changes in longer term growth rates within your portfolio post COVID?
Let's see here. Look, the only business that we have that is tangibly benefiting from COVID today would be biopharma. But that is a business, I think we sized it up for you. I mean, look, it's great, it's growing fantastically, the margins are terrific, but it's not overly materially weighted in the portfolio. And that's the one that's benefiting.
I mean, all this Belvac is going to benefit, but we believe that, that is more structural than COVID related just because of this issue of recyclability and moving away from PET. So we don't think that we have a COVID tailwind embedded anywhere in our business. So it's purely a question of the ones that are suffering, the portions of the portfolio suffering, which ones are coming back. I think it's fair to say that the one that we're taking a close look like is that our compression business, which is the one that's levered most to midstream and downstream. Whether that demand in terms of CapEx and maintenance remains subdued in 'twenty one or not.
But again, that is not overly significant to the portfolio. We can weather the storm. So our expectation is that come back on different trajectories based on their end markets.
Thank you. And just a follow-up question, and I apologize if it's been asked, I've been getting disconnected. On textile printing, on printing and ID, textile printing CapEx, you highlighted it digital printing sort of weakness. Given the strength in consumer spending, just a little bit surprised that this business would be weak. Can you just provide more detail as to what's happening there?
Yes, I wouldn't consider it to be weak. I mean revenues were flat and margin was up. I mean, yes, the consumable business is tracking right with consumer goods, which is great. I mean, the printer business and the service business is still a bit choppy because that still requires access rights to customer locations and everything else.
So it's pretty straightforward.
Your next question comes from Joe Ritchie of Goldman Sachs.
Thanks. Good morning, guys.
Hey, Joe.
Hey, Rich. How do we about the backlog conversion in Refrigeration and Food Equipment? And the reason I ask the question is, if you go back to like the few years ago, I don't know, 2015, 2018, it's pretty one for 1 type relationship between your orders and your revenue. And so clearly, in 2019 2020, orders are much better than what your revenue run rate and I know part of that is the automation project. But like how do I think about like the length of the backlog and how that converts over the next couple of years?
Yes. Let me think about this. We are like we give segmental backlogs and I think that we sized the portion of Belvac that's in there, which distorts that backlog because somewhat. The Refrigeration business, in particular, is relatively short cycle. So to the extent that we're getting orders for 2021 is actually early.
Well, it would have been early, let's call it, a month ago, which is a good sign because it's, generally speaking, food retailers don't kind of secure capacity. They just believe that, that markets have been overcapacitized forever. So they just place the orders and you run through hoops to deliver it to them. So I think the good news is based on what our customers are saying about their own CapEx and maintenance programs that we expected to be up in 2021. And the other good data point is, is that we're getting orders for 2021 now, which is technically early, a little bit early.
So that's the good news. But I wouldn't try to disaggregate our segmental backlog because you've got Belvac in there, and it's very material.
Got it. Okay.
That makes sense. And then I guess maybe just kind of the one follow on question would be just around like capital deployment. I know that you guys reinstituted the buyback last quarter. It didn't seem like you guys did much this quarter. How are you guys thinking about that versus you mentioned $200,000,000 to $500,000,000 type deals like where are you kind of like prioritizing your investment right now?
We're still prioritizing on the inorganic. We had to walk away from 1 in the quarter because of for particular issues that would have been an outlay in excess of $300,000,000 So that has changed plans a little bit. Look, at the end of the day, it's a wait and see. We've got a decent pipeline. We'd like to convert that free cash into inorganic investment, but we're not just going to do deals to deploy the capital, right?
They have to be smart and they have to be within the parameters that we've laid out. And if not, then we'll revisit capital return and I'm sure that'll be a discussion we have at the Board meeting next week.
Okay, good to know. Thanks guys.
Your next question comes from the line of Josh Pokrzywinski of Morgan Stanley.
Hey, good morning guys. Good morning. Hi, Josh.
So we've covered a lot
of ground already, but Rich, I want to come back to another comment earlier on the backlog and kind of the visibility into the Q1, first half relative to normal.
How would you size that?
I mean, clearly, I think you're trying to focus people on the comfort with 2021 over 4Q, I totally get that. Any way to put some guidelines around proportional visibility this time of year versus what you would normally have?
I think that we talked about refrigeration at length and we've talked about DelVac that we've seen there. On our longer cycle businesses, MOG comes to mind, DPC to a certain extent. We would expect to deplete backlog in the second half of the year as your bigger projects roll off and then you build it up. We shipped heavily off of that backlog in MOG and it's not as if we're falling into a hole. So I think the good news about MOG is that despite heavy shipments in Q3, that backlog is not depleting at a high rate, which is and that's all 'twenty one just because of the delivery times in those particular businesses.
The balance of the portfolio outside of digital printing is, generally speaking, short cycle. I mentioned Vehicle Service Group, who had an excellent quarter in terms of shipments and operational performance. They've got a little bit of a bad comp in Q4 just because they are running some promotional things last year prior to price increases. But what we're seeing in terms of dealer communication there is very good for 'twenty one. So I think it's anecdotal.
So there's no real general comment for our portfolio this wide. But I think that the signaling we're getting for 2021 overall is prospective.
Got it. So it's not just a phenomenon where, hey, 4Q is a little weaker and January is awesome, but we don't know anything else about 'twenty one.
As I mentioned before, I mean, you think about like a business like ESG, right? If they've got backlog for 'twenty one deliveries, we could make the product in Q4, all right, which positive absorption, negative working capital. I've got confidence in that business to build that product in 2021 and meet the delivery date. So to us, as we've always done around here, Q4 is about cash generation and setting ourselves up for 'twenty one.
Got it. And then I noticed another automation project announced in precision components. Any more, I guess, kind of spread of automation or kind of evangelizing some of the technology out there across the portfolio that we should expect beyond Precision Components and I guess Refrigeration? Is that something that could be kind of the next wave of cost reduction?
There's a few of our businesses that lend themselves to increased automation. As we mentioned during the pumps and process solution virtual investor day that our expectation is to get on a cadence of doing more of those rather than the tour de force on the portfolio. So one of the things that we're discussing is we have 2 big projects, one of which is completed in Vehicle Services Group and one that is under construction around that, that we would expect is a candidate to do some more investor outreach in Q1 of 2021.
Great. Thanks. I'll leave it there.
Your final question today will come from the line of Nigel Coe of Wolfe Research.
Yes. Thanks for squeezing me in. There's not a whole lot to run through here, but just go back to Belvac. Is the strength we've seen in can manufacturing, is the flip side of that that we face some structural headwinds in chemicals, plastics, plumbers, going forward. So therefore, some of the weakness we're seeing in backlog build there is more structural than just typical.
Nigel, I'm sure when I talk about Belvac, the guys at Belvac listen and chuckle to themselves how little I know about can making. So for me to bridge that over into the chemical world on PET, I think you're going to have to ask somebody else. From our customers, both the can makers on the machinery and from the bottlers in terms of the design portion of the can making, we believe that there is a structural change underway. How that impacts PET demand, I'll leave it up to the chemical producers to answer that.
Fair enough. That's a good answer. And then just quickly on the heat exchanges. I think you sell into both commercial and industrial markets. And I think you called out a couple of times, you've seen an uptick the heat exchangers.
Where specifically are you seeing that strength in the end markets?
More on the heat pump side than anything else. That's where our particular strength is and that is where we are in the midst of completing some material capacity expansions. If you know anything about that market, the size of these heat exchangers is getting very large because these are pretty huge systems that are being installed, especially on the back of European legislation. So that's really where the demand function for us is coming from.
Okay. Thanks, Rich.
Thanks.
Thank you. That concludes our question and answer period and Dover's Q3 2020 earnings conference call. You may now disconnect your lines at this time and have a wonderful day.