Morning, and welcome to Dover's Second Quarter 2019 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer Brad Cerypak, 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 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. Mr.
Galiuk, please go ahead.
Thank you, Christy. Good morning, and welcome to Dover's Q2 2019 earnings call. We'll begin with from Rich and Brad, and we will then open the call for questions. This call will be available for playback through August 8, and the audio portion of this call will be archived on our website for 3 months. The replay telephone number is 800-585-8367.
When accessing the playback, you will need to supply the following access code, 225-6006. Dolor provides non GAAP information such as adjusted EPS results and guidance. Reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on our website, dovercorporation.com. Our comments today may contain forward looking statements that are intrinsically subject to uncertainties. We caution everyone to be guided in their analysis of Dover by referring to our Form 10 ks for a list of factors that could cause our results to differ from those anticipated in any forward looking statement.
Also, we undertake no obligation to publicly update or revise any forward looking statements, except as required by law. With that, I would like to turn this call over to Rich.
Thanks, Andre. Good morning, everyone, and thanks for joining us for this morning's conference call. Let's get started on Slide 3. Q2 organic revenue was up nearly 3% for the quarter, driven by continued strong performance in our Fluids segment at 7%, with all markets contributing to comparable growth. Solid trading conditions in the Industrials platform within Engineering Systems, which were able to more than offset forecasted slowdown driven by timing in our digital print business, which I'll get into later in the presentation.
Refrigeration and Food Equipment were shorter projections principally as a result of tougher trading conditions in Asia for heat exchangers as well as refrigeration systems demand. Forecasted demand and recent customer wins, particularly in retail refrigeration case and door, give us confidence for an improved second half of the year. Adjusted segment earnings increased 13% to $311,000,000 contributing to 190 basis point improvement in operating margin over the comparable period. These results were driven by a strong revenue conversion in Engineered Systems and Fluids on volume leverage, good product mix coupled with improvements in productivity and tight cost controls, more than offsetting raw material and labor cost inflation. Adjusted Q2 earnings were up 15% to $229,000,000 and adjusted EPS at $1.56 a share was up 20%.
As announced, we completed the acquisition of All Flow Pump Company, a growing manufacturer of specialty pumps. This acquisition strengthens our leading position in the growing segment of positive displacement pumps for critical fluid transfer applications. Overall, we're encouraged by the results in the second quarter and the first half of twenty nineteen. Demand remains constructive across much of the portfolio. Our rightsizing and operational actions are yielding robust margin improvement.
Domre enters the second half of the solid order backlog augmented by recent customer wins and as well as strong momentum and execution towards margin targets. As a result, we are tight in the top half of our previous full year adjusted EPS guidance range to $5.75 to $5.85 per share. That's it for the opening comments. I'll pass it to Brad and then come back with the segment color. Thanks, Rich.
Let's move to Slide 4. In all, revenue grew by 1% to $1,800,000,000 and was driven by strong demand in fluids in our industrial platform and engineered systems. GAAP EPS increased 25 percent to $1.35 Moving to non GAAP results. As mentioned, we achieved significant margin accretion in the quarter with adjusted segment EBIT up 190 basis points over the prior year, reflecting continued execution of productivity initiatives. Our SG and A actions announced last year are for all intents complete, and we are delivering the savings we expected.
Adjusted segment EBITDA was $376,000,000 a margin of 20.8%. Key adjustments for non GAAP results this quarter were acquisition related amortization and rightsizing and other expenses. The EPS increase was supported by $0.02 or 3,600,000 dollars of discrete tax benefits on par with a $0.02 benefit in the Q2 of the prior year. Now moving to Slide 5. Let's get into a little bit more detail on our revenue and bookings results in the quarter.
As mentioned in our summary, organic growth was solid at 2.9%, driven by fluids and engineered systems and partially offset by refrigeration and Food Equipment. As you can see, foreign exchange rates negatively impacted our revenue and bookings. FX was a significant 2.5 percent or $45,000,000 headwind for revenue, which had an $8,000,000 impact on earnings, with the most notable impact in Engineered Systems, largely driven by printing and identification demand being levered to EMEA and Asia. The 2 largest contributors to the FX headwind were Europe and China, where average exchange rates declined against the dollar by approximately 6%. Based on current rates, we expect the impact to moderate in the second half of the year.
We have used a 1.13 rate for the euro and a 0.15 for the RMB in our full year forecast. From a segment perspective, Engineered Systems grew $12,000,000 or approximately 2% organically and fluids grew $52,000,000 or 7%. Refrigeration and Food Equipment's revenue decreased by $11,000,000 or 3 Bookings declined organically 1.7% and as previously mentioned, were also negatively impacted by FX. At Engineered Systems, organic bookings declined by $39,000,000 or approximately 5.5 percent due to slower activity in digital printing and the Environmental Solutions Group. Bookings in fluids increased by $52,000,000 or 7 percent with strong order activity across the segment.
Bookings in Refrigeration and Food Equipment declined 43,000,000 dollars Rich will provide more information on the order book in individual businesses in a few minutes. Finally, overall book to bill finished at a solid 1.0, while backlog at the end of Q2 was 2% higher than this time last year, driven primarily by engineered systems. From a geographic perspective, the U. S, our largest market, grew 2% organically, driven by mid single digit growth in Engineered Systems and Fluids, partially offset by Refrigeration and Food Equipment. Europe was up 8% with all segments posting organic growth and a particularly strong quarter from Fluids, which was up over 20% in EMEA.
All of Asia was down 5% organically with China down 1%. Our Fluids business was up mid single digits in Asia overall with double digit growth in China on the strength of both the retail fueling and process solutions whereas engineered systems and refrigeration were down in Asia due to slower economic activity in the region. Let's go to the earnings bridges on Slide 6. Starting on the top. Engineered Systems adjusted segment EBITDA improved $5,000,000 largely driven by volume and productivity initiatives more than offsetting headwinds from FX.
Fluids growth of $35,000,000 reflects a combination of robust growth, continued margin improvement in retail fueling and acquisitions. The $7,000,000 decline at Refrigeration and Food Equipment reflects lower volumes for Schwepp and slower activity in food retail. Going to the bottom chart. Adjusted earnings from continuing operations improved $29,000,000 or 15%, primarily driven by higher segment earnings and lower corporate costs, partially offset by slightly higher taxes. Now on Slide 7.
Year to date, free cash flow was 142,000,000 dollars which is an improvement over last year in absolute terms and as 8% of revenue. The 2nd quarter, in particular, compared favorably at 8.5 percent of revenue versus 6% last year. Year to date, strong top line growth was supported by working capital investment of $164,000,000 which we expect to convert to cash in the back half of the year. Inventory built with volume increases in the quarter as well as in anticipation of a strong Q3. The 3rd and 4th quarters are traditionally our strongest cash generating quarters.
Capital expenditures were $91,000,000 year to date, slightly below last year. We expect our CapEx to ramp up in the second half in line with seasonality of our cash flows and are still on pace to execute our previously guided organic growth investments in the year. Let me turn it back to Rich.
Thanks, Brad. Let's move on to Slide 9. Engineered Systems delivered top line organic growth of 1.7%, largely driven by the industrial platform. As you can see in the bridge, incremental margin conversion on organic growth was over 100% in the quarter, driven by productivity gains and volume leverage. Despite the negative FX translation, adjusted segment margin increased 120 basis points.
Our Printing and ID platform declined organically by 3%, driven by the expected slower activity in digital printing due to the ITMA trade show that happens every 4 years, where customers assess and review the latest technology before making investments. To put that impact in perspective, digital printing was 20% in revenue and 50% in earnings from the comparable quarter in a business that we forecast to grow double digits in revenue for the full year. We are encouraged by the pipeline of orders coming out of the trade show, especially in our Lario industrial printer line and expect the business to reaccelerate into the second half. Overall, the platform performed well in Europe, while Asia experienced continued slowing from Q1. Our industrial platform posted 5% organic growth.
Our waste handling business continued to deliver double digit growth as demand remains strong for both traditional equipment and software, with software growing by over 20% driven by significant ramp in installations. Despite the difficult trading conditions in the general automotive space, our vehicle service business posted 2.4% growth, offsetting the more challenging trading conditions in automotive OEM demand negatively impacting Distaco. MPG was down as demand conditions in the defense sector remain constructive. Going into Q3, bookings for Engineered Systems remained solid. Most businesses posted book to bill of around 1, with the notable exception of our waste handling businesses where orders were slower versus high comps and record backlog in the comparable quarter.
Overall, we entered the second half on solid footing for the segment, largely driven by printing and ID platform, which is accretive to consolidated margins. Moving on to the next slide. The Fluids segment posted strong organic growth of 7.5% for the quarter with continued strength across all the businesses. Adjusted segment margin increased 410 basis points with incremental organic margin conversion at 50% driven by volume leverage, improved productivity and product mix. Adjusted EBITDA margin increased to 22.9%.
Our pumps and process solution business had another excellent quarter posting organic growth of 7%. Demand remained robust for our industrial pumps, rotating equipment components for natural gas compression and renewable energy and equipment for polymer pumps and filtration systems. Biopharma and thermal management markets continued to deliver double digit growth during the quarter as we ready for a significant capacity expansion in this business. Fueling and transport posted organic growth of 8% as demand remained robust across all geographies for both underground and above ground systems. EMV demand, as forecasted, continued to be choppy as all signs point to adoption trajectory continuing beyond 2020 at current activity levels.
Margin conversion on volume was strong in the quarter, and we expect that trend to continue for the balance of the year as we track towards meeting the stated margin objectives in the fueling solutions business. Bookings in the segment grew 7% organically over the comparable period. The growth was broad based with particular strength in our plastics and polymer equipment and biopharma businesses. In Refrigeration and Food Equipment, organic revenue was down 2.8% at adjusted EBIT margin of 15%. Demand for the margin accretive swept heat exchanger business was down 6% in the quarter, most notably in Asia.
Activity in food retail was mixed with systems and service projects posting a decline year over year, while our door case product line, food retail's largest, posted double digit growth in revenue and backlog as retailers restarted investing in store formats and refurbishment. United Brands grew modestly despite a challenging comparison to the prior year as several large chain rollouts were shipped on orders booked last year. And Belvac revenue increased modestly, however, bookings were slow. The poor mix effect on margins driven by the reduction of heat exchanger and system shipments was further exasperated by volume ramp costs in retail refrigeration, which struggled with supply chain constraints and labor availability at our principal production site in Richmond. While we are encouraged by the turnaround in demand in food retail for our core case and door products, it is absolutely clear that we need to deliver on our automation project to deliver on volume earnings conversion.
Bookings in the segment were slower this quarter posting 10% organic decline mainly due to lower activity in refrigeration systems businesses and can making equipment. In food retail, recent customer wins versus this time last year give us confidence about the improved revenue outlook for the second half. Moving to Slide 12. Slide 12 disaggregates the key sources of EPS accretion for the quarter. Dover continues to deliver unannounced cost actions incremental to margin for the quarter was at 21% and is expected to be the lowest percentage conversion for the year as a result of the negative mix effect on the high margin printing and identification platform in this quarter.
Moving on, we're reiterating our revenue guidance for Fluids and Engineering Systems based on order books and forecasted growth in printing and ID and have lowered refrigeration and food equipment as we are cautious on Asia and systems demand in the second half. Overall, we are encouraged with the performance in the first half of the year. Organic growth is 5.5% with good margin conversion. We are executing well on productivity and cost initiatives. Demand remains supportive across most businesses, but visibility and sentiment remain cautious in some sectors.
Despite the cautious macro environment, we are in control of a significant portion of our year over year profit change. And as such we are tightening on our full year guidance range to $5.75 to $5.85 per share. Lastly, as a note, we are targeting mid September to host the Dover Day in Chicago, where we will provide an update on our progress of previously announced initiatives and a review of our portfolio strategy. We'll provide more information on that soon. So that's the presentation.
Let's move on to
Q and A. Thank you. The floor is now open for questions. Your first question is from Jeffrey Sprague of Vertical Research Partners.
Hey, first on kind of the Product ID and Printing businesses, thanks for that color on kind of the Itna effect. But can you give us now a little bit of additional color then on what orders ought to look like in Q3? Do we see a big order bump there? And I just wonder if you could also extend the conversation about that segment to kind of the Marcum Homage piece of the business also.
Okay, sure. If we were to normalize our revenue through the quarters, the effect of printing of digital printing on the quarter was a little bit in excess of 0.5 points of organic growth. So I mean we knew this was coming. Total corporation. Yes, for the total corporation that is not just the segment.
Look, we knew this was coming. I can tell you that the feedback that we get in terms of orders in the pipeline is very encouraging. I think that we are very conservative of how we recognize bookings in that particular segment, but we're talking about €2,000,000 pieces of equipment. So we wait until we have letters of credits in place and a variety of other things before we put them into backlog. I would expect that we'll book a decent portion of that in Q3.
But I can tell you that we've already begun to ship in Q3 in that particular sector. So we're that's why we're confident in terms of the both the margin impact on the segment in the second half. As it relates to MI in total, MI had a very good Q1. It was slightly slower in Q2, largely driven by Asia. They had another very good month another good month or quarter in Europe.
Our full year expectations is for growth to come back modestly in MI, but margin accretion to be robust in the second half.
And if there's a second question, if I could, just on Refrigeration. So your comment about recent customer wins sounds like it's a food comment, not a refrigeration comment. Just to clarify that.
That's a refrigeration comment, but go ahead.
So that is a refrigeration comment. So could you elaborate a little bit on that? And I guess the comment about struggling with the volume ramp up, right? Your orders don't suggest there's a strong volume ramp up, but obviously you're in kind of a seasonal period. Is that what you're suggesting, just kind of normal seasonality, there's a little bit struggle or there's something else?
No, look, I think that what we have is we have to separate the segment into its component parts, right? So let's put heat exchangers to the side for a moment. What we're saying is on the systems business of refrigeration, that's been slow. So that is disproportionate amount of the decline in the bookings. The bookings on case and Door, on the other hand, are up significantly and our production has ramped up significantly in Case and Door.
Unfortunately, during the quarter, that is because of the labor intensity of that product line, a significant volume ramp comes at some cost that quite frankly we struggled with and coupled with that that we had a supplier that went belly up in the middle of the transition. So I think overall, it cost us approximately $4,000,000 to $5,000,000 in the quarter of kind of let's call that frictional cost with the ramp up. We'll do better going forward from here. But at the end of the day, I think that we're pleased with our ability to compete in the marketplace. We're pleased that the order volume is ramping in door and case.
So retail refrigeration is actually moving up right now, but it's absolutely clear in order to change the profitability aspect of this business, we've got to get this automation complete. So we're keeping 2 balls in the air where we're gaining market share in door and case. We like the way the business is moving. It's going to come at some cost, so we don't have a lot of significant margin accretion associated with that. We'll get some absolute profit increase on the volume, but the margin accretion, I think, until we change how we run this business in terms of SKU management and commonality of component parts, that's really what's going to trigger
it. Great, thanks. I'll leave it there. Okay.
Thank you. Your next question is from Steve Tusa of JPMorgan.
Hey guys, good morning.
Good morning.
Good execution in kind of an uncertain environment. On the product ID side, you mentioned bookings were down in Asia. Are you seeing anything in kind of the machine builder channel that is a bit more choppy than expected, given that there's a lot of cross border kind of activity for those guys, the small machine builders in the U. S. And Europe that are kind of selling into there that your products may kind of go along the same line with?
Steve, I don't know that question. I'd have to go back to the guys and we'd have to see the segmentation of the individual markets that they sell into. I just think that overall
Was that still a digital printing issue in Asia for that segment? Or was that that seemed to be more of a core comment on kind of core MI into Asia?
Yes, it's more of a core MI into Asia. On the digital printing side, in our particular space, which is at the top end of the market, the demand looks very proactive for the next several years just in terms of the proportionality of versus ticket price of those machines. I think that's a timing issue. And as I mentioned before, that's a business that we expect to grow revenues by double digits for the full year. So that side, we're confident on as long as we can get the letters of credits and everything all lined up based on what we think that the backlog is going to be.
On the MI side, it was a little bit choppy. So I don't think that I think that China was down 1% and I think that India was down a couple of percentage points during the quarter. I think that that is a reflection of kind of what's going on in China, but I don't have any real color on the segmentation of their customers of Mi in China and I have to get that.
Okay. No problem. You're plenty busy, so don't worry about it. On the price cost, the Refrigeration business, which I would have thought needed to get a little more price to kind of offset any kind of material inflation or tariff kind of impacts. You didn't get price in that segment.
Was that kind of where you probably saw the biggest headwind from price cost or did you not really have a headwind from price cost this quarter?
I'd have to go and disaggregate it, but I think on retail refrigeration, it's probably neutral, not counting the frictional cost because that's not that's cost self inflicted quite frankly. So I think we're probably neutral in retail refrigeration. I'd have to go take a look at the other segments. Swept's a difficult one because it's euro based, but it's got a lot of China exposure. So we'd have to go get that FX translation.
All right.
Sorry to give you a long to do list. Thanks a lot.
All right. No problem.
Thank you. Your next question is from Andrew Obin of Bank of America.
Yes, good morning. Good morning. Just a question on free cash flow. I think you gave a fairly wide target for the year, 8% to 12%. You seem to be running well ahead of last year.
Where do you think you guys are going to come out within that range given the performance year to date? And other than CapEx, any sort of big movements in working capital in the second half that we should be aware?
Well, I mean, I think the working capital seasonality should hold, okay? So that's 1st and foremost. I mean, our target is to hit spot on in the middle of the range, which is exactly we did last year. We are running a little bit behind in CapEx versus our full year guidance. So I think that we're tracking probably to the lower end of the range on CapEx for the full year.
But look that swing number versus the entire working capital change is something, but I don't think it's anything overall. At the end of the day, as what we said before, we can we're working on grinding down working capital as a percentage of revenue or increasing turns across the portfolio. But what's really going to swing it for us at the end of the day is what the second half growth rate looks like. If we reaccelerate in the second half of the year, then the industrial inventory won't come down. If we don't, then we would expect the same kind of liquidating or liquidation profile that we showed you last year in
Q4. And just a follow-up question on operations, just inefficiency at Refrigeration and Food Equipment on ramp up. Any of it relating to restructuring and operational changes that you guys are making. And just if you can sort of provide us broader color, you've sort of now been at Dover for a while. How do you feel about the runway for cost takeout going forward and ability to execute?
And I appreciate that you have not provided any specific targets for next year, but just to give us a broader update. Thank you.
Sure. The margin target that we gave for retail refrigeration as September holds. That requires us to intervene on the production footprint. And as we've said before, that process is underway. But this is not just basically installing some equipment and that changes the business.
The business is working on a fundamental change of how they run the business, particularly as it relates to SKU management, commonality of components and a variety of other things, which allows for automation in the future. I think that when we announced the investment that we were going to make, we said it's kind of going to be a little bit of a chicken and egg because at the time we were at the bottom of the market in terms of the demand function for door and case. And now that market is coming back and we're going to have to run the business in its more traditional labor intensive way until we get everything stood up. But we need to protect market share and we need to protect the amount of volume that we've got going into fundamentally changing the business. So at the end of the day, I'm not making any excuses for it.
I think that we struggled with getting the available labor in the market with employment rates of what they are. It's tough. And as I mentioned, we had a supplier kind of go belly up on us in the middle or the beginning of the quarter, which cost us some money. So I would expect that we improve over our performance in Q2. But really what's fundamentally going to change this business is changing basically how we manage our SKUs and how much labor content is in this process.
Thanks. Yes.
Thank you. Your next question is from John Inch of Gordon Haskett.
Good morning, everybody. Good morning. Rich and Brad, if you were to sort of we've talked about Asia and parts of selective implications of detraction. How much would you say Asia detracted overall from the results? Maybe you could look at it sequentially or however you'd like to characterize it?
Obviously, not a big company in Asia, but it's still helpful, I think, to put that into a kind of a jumbled bucket.
Well, I think that look, I think that Brad mentioned in his comments what total translation impact was. So there's the FX component of Asia, which you can calculate, right? So it's a percentage piece based on the geographic distribution out of the $7,000,000 to $8,000,000 of translation loss that we occurred in the quarter. So that's a piece. And then I think the quarter over quarter profit of Mi is Asia driven mostly, right?
But I know that you can't see Mi at the
end of the day, but digital printing impact. But I gave you some color in terms of what that was.
Right. And then you have the offsets from retail fueling having a really good quarter and continuing to have a good quarter in China. So, if you put all that together, not having exact data in front of me, I would say, China down slightly on the revs, but earnings still remains positive for us. Yes. I mean, Swept was 4,
so somewhere between $4,000,000 $8,000,000 probably in the quarter.
Okay. No, that's helpful. Rich, at EPG, you alluded to the fact that you thought Dover might be perhaps one of the very few companies to benefit from these List 3 tariffs. Could you is there any way you could expand a little bit on that? I've got a few questions on that.
Where exactly would that be benefiting you? And do you think it's sustainable, it's a market share opportunity? Like how exactly is this playing out?
Well, I mean, I think it's been a benefit just because of our participation in the markets with our critical components that our price cost versus tariffs has been positive, number 1. Number 2, you can read in the paper every day about people readdressing their supply chains, and we're the beneficiary of that just because we're a component supplier that's levered largely to North American production. Conversely, at the end of the day, I'm not like I don't want to take this as a like I'm positive on tariffs. I think that it's just been we've been positioned appropriately just because of the nature of our business so far. But to the extent that those tariffs cause a significant slowdown in Asia, then as you can see from the results that we have here, then it ultimately it becomes a little bit of a negative on our revenue streams in Asia.
But on the North American side of the business, it had been positive, both from a price realization point of view and a volume point of view.
Maybe just lastly, Fluids sustained basis. But maybe you could just talk to your conviction in the portfolio, which I realize has got some niche elements to it. The portfolio overall in fluids being able to kind of ex compares still put up a cadence of robust growth against the backdrop of a global softening. How should we think about this, do you think?
Look, I mean, it is a collection of businesses and there's a variety of things going on, right? We've got a high growth business that's sitting in with biopharma that's growing in high teens, let's call it, and has been for some period of time. So you've got a high grade at high margin. So you've got that portion of the portfolio. We think that we have a pumps franchise that is able to compete both on macro growth and from a competitive point of view.
So there is an element of share gain despite the fact that those trying to calculate share gain in a very dispersed business is difficult. We believe that we're winning in the marketplace on that particular side. And on the fluid side of the business, we've got a best in class underground franchise that is driven by regulatory growth. And I would say that we're probably gaining market share there also. And most importantly, as we had highlighted last year, I think that our above ground business improved margins, comparable margins by 400 basis points quarter to quarter.
So basically, we are on track to meet what we said by exit this year. So you've got a high growth element and then you've got some niche franchises that are winning in the marketplace and you've got one big piece of the business that it's improving their margins dramatically.
And is there a runway of deals to do in the space, Rich, that would meet your returns criteria and pricing and so forth?
I hope so.
I guess
we'll hear more in September. Thank you very much. Appreciate it.
Thank you. Your next question is from Andrew Kaplowitz of Citi.
Rich, you mentioned at EPG that DFS would probably only reach the bottom of the 15% to 17% margin range for the year. But you just kind of answered John's question and you kind of said that DFS now seems on track, obviously, at very strong incrementals in the quarter. Did something change? Is it just that they're just trying to get their act together there? I mean, you've been better all year, but you did make those comments at EPG.
Yes. Look, I'm not I think that the range that we have for exit is 15% to 17%. I said we are tracking toward the bottom. Can we beat it? Sure, we can.
But let's walk through another quarter or so and see where we are. But I think that we're not out of the woods from a comp point of view before we get excited about the margin comparison. But I think the team is on it. And clearly, a 400 basis point accretion in the comparable quarter is great and it puts us on the trajectory to meet those exit numbers. The we're term target for that particular business because even at exit, when we comp it against the competition, we've got some room to go.
But so far so good, and we're very pleased with the effort of that particular business to grind it out.
That's great. And then last quarter, Rich, in ESG in particular, you mentioned that you had decent visibility into the business in Q3, but you needed another quarter under your belt to see how the business would fare for the year. So how are you thinking about ESG bookings and revenue growth in particular for the second half of the year? And what kind of visibility do you have at this point?
Look, we feel good about ESG for the year. So I think clearly that when we're looking for that business to slow down, we don't think it's going to this year. We're booked pretty much through the end of Q3. We're waiting on a few orders in back logs. So hopefully, by the time we do this again in another 90 days that the backlog will actually probably stay even to go up slightly, which would solidify the full year.
We're very pleased with the growth that we're getting out of the software franchise. So we've noted that, that particular piece of the business has grown 20% and it's not margin accretive yet because it's just on installs, but we expect the leverage on that to be significant going into 2020.
Thanks guys.
Thanks. Thank
you. Your next question is from Julian Mitchell of Barclays.
Hi, good morning. Maybe a first question around capital deployment. There was no buyback spend in the 1st 6 months of the year, a couple of small acquisitions and you closed on all flow pump. So maybe give us some update on, at least for this year specifically, how you're thinking about capital deployment? I understand we'll hear about the medium term in 8 weeks' time.
Well, I mean, in general terms, Julian, it's basically what we said before. Our bias is for organic investment followed by inorganic investment going to capital return. I think that we've got a return. I think that we've got a relatively robust pipeline on the inorganic side. So we'll keep our powder dry to see how that develops over the next few months.
If we are unable to close on those, then we'll revisit the issue of capital return for sure.
I see. So if we don't see a big step up in M and A, we can expect more buybacks by year end?
At some point, I don't want to put a calendar on it, but at some point, we're not going to we have an expectation in terms of cash flow for the year. We're not going to sit on a significant pile of cash at negative carry for sure. We prefer to deploy it.
Understood. Thank you. And then my follow-up would be, just looking at the aggregate profitability in Refrigeration and Food Equipment, Should we expect the profits in that division to be flattish year on year for 2019 as a whole? Or does the is that just dependent on the Richmond site productivity efforts?
Our expectation is for revs and profits to be up year over year.
Perfect. Thank you.
Thank you. Your next question is from Nigel Coe of Wolfe Research.
Thanks. Good morning. We've touched on a lot already, but I do want to pick up on the last question from Julian. The growth in Refrigeration and Foods, we've got a slight down organic in the first half of the year. Backlog is pretty flat.
We burned backlog in 2Q modestly. What is the degree of conviction in the second half moving to sort of a 3%, 4% organic growth rate?
Well, I mean, look, at the end of the day, I think we moved the segment down by 1 point, okay? I think that our conviction in food retail for growth is quite high. We actually missed, from a calendarization point of view, an order that we would have liked to been able to book at the end of June, but you can't book until you have the order at
the end
of the day. It's coming in now.
So it's coming in now. So just to give you some color on bookings as we proceed into Q3, we're quite constructive there. For us, it's the margin conversion issue in that particular segment. We've got some aspirations there. But as we said before, I think that we need to change the dynamic of that business in terms of working on SKU management and reducing the amount of labor content, but that the benefits of that don't come in until mid-twenty.
So I think that overall, we're pleased in terms of the demand dynamic for door and case, what's going on in the marketplace. It's up to us to try to maximize profitability out of it in the second half of the year.
Thanks, Rich. That's great color. And then maybe just characterize what you're hearing from kind of your field organization, your channel partners. And spirit of the question really is that some of the distributors in the U. S.
Have been talking about a change in customer behavior through June towards the end of last quarter. And you alluded to kind of lower end of the CapEx for full year. And I'm wondering if maybe you're pulling back a little bit or dialing back a little bit on investment spend in the back half of the year, because I think that was more back end loaded in your plans. So any color around that would be great.
Yes. Let me I'll start with the second and go back to the first. I think, no, we're not pulling back on CapEx. It's just as it always happens, you've got aspirations to spend this money and then it takes time to actually deploy it. Because if you think about what we're doing with our new plant up in Minneapolis for CPC, by the time we work through getting building permits and a variety of other things, you're 3 months behind and then timing.
So I think that that capital will be deployed overall. But I think it's probably a piece of it's going to slip into 2020 just because of capital timing at the end of the day. So we're not pulling back the aspirations. But then again, we did give a range and we're probably going to come out at the bottom it now, the way things look from a calendarization point of view. Well, with the amount with the different types of businesses that we have in the portfolio, you can imagine the plethora of mixed messaging that we get from the marketplace.
I can just tell you as a general comment that the sentiment was more negative at the beginning of the quarter, so than it was at the end of the quarter. We actually went through this issue that back in April that we were kind of worried a little bit about backlogs and a variety of other things. And then we actually accelerated in the quarter in terms of both our own shipment performance and our backlog. So it's a little bit of an odd situation that's going on out there in terms of what we're hearing from the marketplace and how that's developed into kind of our forecasting. I can just tell you that leaving the quarter and based on, A, what's in our control and what need to do to convert to get to the top end of the range, if you look down at the squeeze, I think that we're in good shape.
That's you're right. It's a very odd environment. Well, thanks for the color, Rich, and good luck. Thanks.
Thanks.
Thank you. Your next question is from Scott Davis of Melius Research.
Hi, good morning, guys. Hey,
Scott. I,
I can't remember if you mentioned this at EPG or not, but what were the return kind of hurdles that you crossed for this all flow pump? Was it double digit by year 4 or something like that? Or did you not mention that yet?
It's 10 by year 3.
10 by year 3. Okay. And then I have a question that covered your stock for a while and I don't know the answer to this. The Environmental Solutions business, you mentioned software sales. I just can't recall what that is.
Can you remember how much time?
Nova made an acquisition a couple of years ago called Third Eye that was principally there for doing driver safety, but has managed now to expand what it sells around that camera technology that is quite interesting. And the adoption rate over the last 6 months at some major independent carriers have been excellent.
Is that a mean can you size that business? Is it big enough to move the needle? I
hope so. In the future, I can just tell you that off a relatively, let me think about it in the context of ESG, yes, I mean, it's big enough to move the needle over time.
Okay. And then just last question just on portfolio, and I imagine we'll get into this at Dover Day in mid September. But are you reasonably happy with the portfolio you have now, Rich? I mean, I know you've got some challenges in refrigeration. But is this if we look out or 5 years, 2 years from now, is there likely to be further divestitures?
Well, I don't want to get ahead of our big presentation in September. Nothing in the portfolio is destroying capital at its present. But 5 years from now, is the portfolio going to look different than it is today? The answer is yes.
Okay. All right. We'll see you in September. Thanks, guys.
Thanks. See you, Scott.
Thank you. Your next question comes from Mig Dobre of Baird.
Yes. Thank you. Good morning. Just I want to go back to your comments from about 2 minutes ago on just trends through the quarter. I mean, understand your comments on Asia and maybe portions of the business in there being a little bit weaker, but it seems to me that everything else is trending pretty well.
So guess, against this theme, if you would, of macroeconomic uncertainty, can you kind of help us understand if there is anything that slowed maybe through the quarter, where was it? And if things maybe held better than what you the
entire
the entire fluids segment is performing slightly better than we would have expected. I think on the top line and I think that we're pleased with the trajectory of the earnings for sure. We would have we did not expect the slowdown in heat exchangers demand during the Q2 nor did we expect the FX. So between those two, that probably cost us $7,000,000 to $8,000,000 in profit during the quarter. So those were unexpected.
There's certain portions of the portfolio like the small exposure that we have to automotive OEM that we expected to slow and it did in fact slow during the quarter. But that we had modeled into our full year forecast at the end of last year in the first place. So I think that we would have not forecast the frictional costs in Richmond due to the fact of labor unavailability and a supplier issue that we had. DDP, as we've beaten that to death, we expected that in the quarter. So that's not a surprise.
I think that the heat exchanger business and the FX translation is the two areas that when we take a look at what we had forecasted at kind of the beginning of the quarter versus the end of the quarter where we are. We would have liked to do better a little bit on the backlog. And as I mentioned before, we had a couple orders coming that we would have liked to get into June. I can tell you just as some further color on the DDP side. I mean, we did that trade show.
And if you go back and look at my comments, I think that we're really pleased with the feedback that we have, but we didn't book anything in Q2 in DDP. So to the extent that we can convert that interest into bookings in Q3, we would expect to see a good bounce back there.
All right. That's helpful. And then maybe for my follow-up, I saw last night you announced a partnership with ABB for Dover fueling. So maybe you can give us some thoughts here as to what the revenue model might be, the growth opportunity, how do you see the retrofit of existing infrastructure, what's the game plan?
Well, look, I can't monetize it for you right now because we just signed it yesterday. But in effect, we've always said that we recognize fact that EV chargers, there is going to be somewhat of a future and that we can all debate what the size of that is, but we've signed a Europe contract with ABB where we'd be purchasing chargers for resale into both our distribution and direct customer network and then we'd be moving to purchasing kits that would be incorporated into our dispenser factor over time and spare parts. So too early to start to say size and scale, but I think it was important that we develop partnerships because we're very attractive to that we have to distribution network and our OEM customers.
Last question. Do you foresee having the need to make any sort of changes to the way you operate or go to market or really anything in order to be able to capture on this opportunity? Or is it just with your installed base, for lack of a better term, in terms of operation?
The latter.
All right. Thank you. You're welcome.
Thank you. Your next question is from Joe Ritchie of Goldman Sachs.
Thanks. Good morning, guys.
Good morning,
Maybe just touching on the rightsizing benefits for a second. Obviously, you guys have executed well in that regard. And I think we're you've had about a $0.30 benefit so far this year. It seems like we're probably going to be through most of it, I guess, as we get into 3Q. And so as you kind of think about the composition of your guidance into the second half of the year, how are you thinking about the importance of getting a little bit better leverage out of your organic volumes in order to hit your guidance?
And what are kind of the puts in there? Yes.
I got you. And we knew that was a question. If you go back and look at my comments, I said that the margin conversion in Q2 is likely to be the lowest for Dover for the full year. So if you go back and take a look at the side of the EPS impact of conversion, we would expect that conversion to go up in Q2 and I mean Q3 and Q4 relative to Q2 and that the SG and A to slowly unwind. But I think that's all baked into what we believe that we need to do to reach the top end of our EPS guidance.
Yes. Rich is referring to the 21% on the chart. You see the 73% there with SG and A, but 21% is going to improve in the back half.
Got it. And the biggest drivers of that, if I'm hearing you guys correctly, is going to come in RF and E and then potentially with digital printing picking back up in E and S or are there other moving parts?
Well, I think that we expect for clearly for engineering systems driven by printing and ID platform within engineering systems. I think that we're going to continue to have very good conversion in aboveground fueling systems on the margin side. And then thirdly, it would be DFR and E, which even when we continue to make strides in performing performance is going to be dilutive to consolidated margins.
Okay. Yes, that makes sense. And then maybe my quick follow-up here, I guess, just to make sure I understand the impact that ITMA had on the quarter, I think you guys said roughly 50 basis points of growth to the whole portfolio, so say call it 100 basis points to 150 basis points on the actual segment. Is the right way to think about it then, call it 2Q growth would have been more like 3% in the segment and maybe that's our starting point with an expectation?
It's higher than that. Yes, we would have rounded up, Joe. So but at the end of the day, it would have been 3.5% or slightly in excess of 3.5% to 4%.
All right. I was talking specifically about in Engineered Systems, right? Yes. That's what we're speaking about. Yes.
Okay. All right. Got it. And that's kind of like the starting point for 3Q? And you guys would expect an improvement on that?
Yes. All right. That would be kind of like the normalized in a business we expect to grow in excess of 10% for the full year.
Got you. Okay. I think I got it. Thank you.
Good.
Thank you. Your next question is from Deane Dray of RBC Capital Markets.
Thank you. Good morning, everyone.
Hi.
Hey, just want to follow-up on that last comment on digital printing. The idea here is purchasing managers were out of pocket, so there was no ordering. But when you talk about normalizing, did you launch any new products at the trade show that would create some incremental demand or is it the same product line and just to catch up on orders?
We did launch a product, the Mini Lario, and then we launched a couple of different software solutions and a bundling package of consumable products with the big printers. So we've launched a series of different things. But even if we had not launched anything, we would have had the same demand dynamic because that's just the way the show only happens every 4 years. So everybody holds off until they see what's the latest launch products and what the pricing environment is and a variety of other things.
And if I go back to what Rich said, the order take was very good at that show, but we're not showing them in our bookings until we get the credit lined up with our customer base. You can imagine, we ship those all over the globe and we're very conscious of being paid for what we ship. So we wind that up first.
Got it. And then just a clarification on heat exchangers that came up a number of times. You sized it. I think you said 4,000,000 dollars But what do you attribute the slowdown or the fall off in demand? Was there any share loss?
Is this trade uncertainty? But
what would you point to there?
Yes. I'm always shy away of any of our businesses having a being a macro driver. What I can tell you is, is that it was mostly China and it was mostly non refrigeration product line. HVAC.
Yes, non
HVAC. Non HVAC product line, so industrial applications.
Got it. Thank you.
Thank you. That concludes our question and answer period. I would now like to turn the call back over to Mr. Galiak for closing remarks.
Thank This concludes our conference call. We thank you for your interest in Dover and look forward to speaking to you next quarter.
Thank you. That concludes today's Q2 2019 Dover earnings conference call. You may disconnect your lines at this time and have a wonderful day.