Dover Corporation (DOV) Q1 2015 Earnings Report, Transcript and Summary

Good morning. And welcome to the First Quarter 2015 Dover Earnings Conference Call. With us today are Bob Livingston, President and Chief Executive Officer; Brad Cerepak, Senior Vice President and CFO; and Paul Goldberg, Vice President of Investor Relations. After the speakers’ opening remarks, there will be a question-and-answer period. [Operator Instructions] 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 conference over to Mr. Paul Goldberg. Please go ahead, sir.

Thank you, [Nancy] [ph]. Good morning. And welcome to Dover’s first quarter earnings call. With me today are Bob Livingston and Brad Cerepak. Today’s call will begin with some comments from Bob and Brad on Dover’s first quarter operating and financial performance, and follow with an update of our 2015 outlook. We will then open the call up for some questions. As a courtesy, we kindly ask that you limit yourself to one question with a follow-up. Please note that our current earnings release, Form 10-Q, investor supplement, and associated presentation, can be found on our website, dovercorporation.com. This call will be available for playback through May 5th and the audio portion of this call will be archived on our website for three months. The replay telephone number is (800) 585-8367 and when accessing the playback, you’ll need to supply the following access code, 19194889. Before we get started, I’d like to remind everyone that our comments today, which are intended to supplement your understanding of Dover, may contain certain forward-looking statements that are inherently subject to uncertainties. We caution everyone to be guided in their analysis of Dover by referring to our Forms 10-K and 10-Q for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statements. Also, we undertake no obligation to publicly update or revise any forward-looking statements except as required by law. We also would direct your attention to our website, where considerably more information can be found on Dover. And with that, I’d like to turn the call over to Bob.

Thanks Paul. Good morning, everyone. And thank you for joining us for this morning’s conference call. Our businesses continue to perform well against the backdrop of significant headwinds in our Energy-related markets, as well as the increasing FX impact of the strengthening U.S. dollar and slower than expected activity in our core retail Refrigeration markets. These headwinds caused our first quarter results to be below our expectations. We continued to take aggressive restructuring actions to better align our costs to anticipated demand, just as we did in the fourth quarter. From a geographic perspective, our non-Energy related U.S. markets moderated, while Europe and Asia were solid. Excluding U.S. Energy markets all regions grew in a quarter. Now let me share some specific comments on the quarter. In Energy, our drilling and production businesses were significantly impacted by a sharper than anticipated decline in the North American oil and gas markets, resulting in customer destocking and lower order activity. In response, we took restructuring actions during the quarter to better align our cost base and we will continue to pursue appropriate cost reductions going forward. In Engineered Systems, we achieved solid organic growth across both platforms. Within printing and identification, our businesses performed very well globally. The industrial platform achieved broad based organic growth lead by continued solid results in our waste handling and auto-related businesses. Our Fluids segment once again performed well. We are continuing strong market conditions for fluid transfer products were primary driver. The majority of our pump markets remained solid. Though, year-over-year comps were impacted by strong project shipments in the first quarter of last year. The Refrigeration & Food Equipment market has remained stable. We expected a slow start to the year based on reduced activity from a key retail Refrigeration customer and volume from other customers has been slower to develop than anticipated. We expect overall customer activity to pick up in the back half of the year. Additionally, our glass door business has remained strong. Our acquisition pipeline rebuilt nicely in the first quarter and is now quite robust. And I am optimistic that we will close on several acquisitions in the back half of the year. In addition, we completed the sale of the business in the first quarter for $185 million and also announced the agreement to sell another for $500 million. We will use the deal proceeds to complete our previously announced $600 million of share repurchases in 2015. Now let me address our revised outlook for the year, which is largely unchanged for Engineered Systems and Fluids except for FX. Their markets have remained healthy and we expect them to have solid growth in 2015. As you would expect, North American Energy fundamentals are having the biggest impact on our forecast. As a result, we expect significantly lower revenue in our drilling and production businesses. Several of our other businesses in our Energy segment are less expose to upstream oil and gas activity, and thus have been less impacted than our drilling and production businesses. Overall, we expect the second quarter to be the lowest revenue quarter of the year for Energy. In Engineered Systems we anticipate continued growth in our industrial platform and strong results in printing and identification driven by new product introductions and positive market dynamics, largely offset by increased FX headwinds. Regarding Fluids, we believe the solid global markets will continue for fluid transfer and most of our pumped businesses. Our expectations are supported by ongoing safety and environmental regulations, a positive retail and fueling environment and new pumped product introductions partially offset by the impact of FX. And lastly, within Refrigeration & Food Equipment, we now expect a tougher year driven by lower order activity for our cases and systems. We do expect our glass door, heat exchanger and commercial food equipment businesses to perform well and help mitigate the previously mentioned softness. With that, let met turn it over to Brad.

Thanks, Bob. Good morning, everyone. Let’s start on slide three of our presentation deck. Today, we reported first quarter revenue of $1.7 billion, a decrease of 5%. This result was comprised of an organic revenue decline of 6%, growth from acquisitions of 5%, and an FX headwind of 4%. EPS was $0.72, including $0.10 of restructuring. Segment margin for the quarter was 13.5%, 340 basis points below last year. Adjusting for restructuring and normal acquisition purchase accounting cost, our overall margin was 15.5%. Bookings decreased 11% over the prior year to $1.7 billion, reflecting weak energy macros, softer orders rates in refrigeration and FX impacts. Overall book-to-bill finished at 1.02. Our backlog decreased 13% to $1.2 billion. Free cash flow was strong at $103 million for the quarter or 6% of revenue. For the full year, we expect to generate free cash flow of approximately 11% of revenue. Now let’s turn to slide four. Engineered Systems grew organic revenue 6% with broad-based growth in both platforms. Fluids grew 2% benefiting from solid fluid transfer markets, partially offset by tough comps connected to a larger order shipped last year. Refrigeration & Food Equipment’s organic revenue declined 7% on tough comps in retail refrigeration and can shaping equipment. As discussed on previous calls, the can shaping business can’t be lumpy quarter-to-quarter, but the market remains solid overall. Weak macros in Energy drove organic revenue down 24%. Acquisition growth in the quarter was 5%, comprised of 15% in Energy, 2% in Fluids, and 1% in Engineered Systems. FX impacted to total company by 4% as seen on the chart. Turning to slide five in our sequential results. Revenue decreased 13% from the fourth quarter primarily reflecting weak drilling and production markets, softer retail refrigeration activity, impact of FX, and the timing of pump shipments. Overall Energy decreased 22%, Refrigeration & Food Equipment decreased 19% coming off a strong fourth quarter, Fluids was down 10%, and Engineered Systems declined 3%. Sequential bookings decreased 7%. Of note, Energy declined 22% on weak market fundamentals. Engineered Systems was down 8%, principally driven by tough comps in waste handling. Refrigeration & Food Equipment seasonally increased 14%, although less than anticipated. Now moving on to slide six. Energy revenue of $430 million decreased 10% and earnings of $52 million decreased 56% from last year. Excluding the combined $29 million impact of Q1 restructuring and purchase accounting cost, earnings decreased 32%. Energy’s results were significantly impacted by a steeper and broader deterioration of the North American oil and gas markets than previously forecasted. The result was reduced E&P CapEx spending and significant customer destocking, most notably in our North American drilling and production markets. Solid activity in compression winches ESPs and international markets helped to partially offset challenges in our business. We took additional restructuring actions in the first quarter to better align our cost. Over the last two quarters we have incurred approximately $25 million in charges in our Energy segment. These actions will provide $45 million in benefits this year. In addition, we have taken other cost reduction actions, which should provide an incremental $30 million in savings. Excluding the Q1 restructuring and purchase accounting cost, our adjusted operating margin was 18.8%, reflecting lower volume and modest price declines, offset by the benefits of productivity and prior period restructuring. Bookings were $417 million, a decrease of 13% from the prior year. Book-to-bill was 0.97. Turning to slide seven. Engineered Systems had another solid quarter, where total revenue of $573 million was up 1% overall, earnings of $88 million increased 6%. Our Printing and Identification platform revenue of $230 million decreased 1% overall. Of note, organic revenue grew 8% but was offset by significant FX headwinds. These results were driven by continued strong digital printing activity and solid global markets in our core printing and coding business. In the Industrial platform, revenue grew 2% to $343 million including organic growth of 4% offset by FX headwinds. Revenue growth continued to be particularly strong in our waste handling business. Margin was up 70 basis points to 15.4% on volume leverage and productivity. A one-time insurance recovery of $4 million largely offset incremental restructuring charges in the quarter. Bookings were $573 million, a decrease of 8% reflecting an organic bookings decline of 3% and 6% impact from FX. Our Printing & Identification bookings deceased 6% to $236 million. However, adjusting for FX, organic bookings were up 3%.Industrial bookings decreased 9% to $337 million, largely reflecting impact of order timing and waste handing and softer markets in a hydraulic cylinder business. Book-to-bill for Printing & Identification was 1.02, while Industrials was 0.98. Overall, book-to-bill was 1. Now moving to slide eight. Within Fluids revenue decreased 1% to $340 million and earnings of $55 million declined 6%. Revenue performance was driven by organic growth of 2% and acquisition growth of 2% offset by FX headwinds. Our Fluid Transfer businesses continue to benefit from strong demand in global retail fueling markets and ongoing safety and environmental regulations. Pumps results were primarily impacted by the timing of large shipments to customers in the plastic and polymers markets. Segment margin was 16.1%, a decrease of 70 basis points largely reflecting product mix. Bookings were $339 million, a decrease of 7%, primarily reflecting the timing of project-related orders within pumps, partially offset by solid fluid transfer markets. Book-to-bill was 1. Now let’s turn to slide nine. Refrigeration & Food Equipment’s revenue of $372 million declined 10% from the prior year. Earnings decreased 19% to $36 million. Revenue performance in the quarter was essentially as expected. Our results were largely driven by reduced order activity for refrigeration systems and cases by a key retail customer, which offset solid heat exchanger in commercial Food Equipment activity. Operating margin was 9.7%, a 120 basis point decrease from last year. This result largely reflects reduced volume and product mix. Bookings were $420 million, a decrease of 15%, principally reflecting slower and anticipated order activity from our core Refrigeration customers. Book-to-bill was 1.13. Going to the overview slide number 10. First quarter net interest expense was $32 million, in line with our forecast. Corporate expense was $35 million, up $4 million from last year and consistent with expectations. Our first quarter tax rate was approximately 29%, essentially in line with our revised full year forecast. Capital expenditures were $28 million in the quarter. Lastly in the quarter, we repurchased 2.8 million shares for $200 million. As previously communicated, we will repurchase a total of $600 million in shares this year. Now onto slide 11, which is an update on Energy. We now expect full year revenue for Energy to decline 16% to 18%, a reduction of about 10 points from our prior forecast or about $200 million in revenue with organic revenue declining 24% to 26%. The biggest changes in our Drilling & Production in automation markets and although less exposed, our Bearings and Compression forecast has also been revised to reflect general energy market conditions. Moving onto slide 12, which shows our full year guidance. We now expect full year revenue to be down 4% to 6%. Our expected organic revenue will decrease 2% to 4%. Completed acquisitions will add approximately 2%. We now expect the total impact of FX to be approximately a 4% headwind. Segment margin is estimated to be between 16.8% and 17.3%, excluding restructuring costs. Corporate expense remains at approximately $125 million and interest expense should be around $127 million. We now expect full year normalized tax rate to be approximately 29%. CapEx should be about 2.3% of revenue and our full year free cash flow will be approximately 11% of revenue. From a segment perspective, Energy’s full year organic revenue forecast has been reduced to a negative 24% to 26%. Refrigeration & Food Equipment’s organic revenue forecast is now expected to be negative 1% to 3%. Energy Systems, Engineered Systems and Fluid organic forecasts are essentially unchanged. Turning to 2015 bridge on slide 13. In 2015, we now expect the year-over-year impact of restructuring costs to be a $0.01 impact to a $0.02 benefit. Performance largely driven by volume but also including items such as price, productivity and restructuring benefits will reduce earnings $0.47 to $0.58. Within this estimate, our restructuring benefits of $0.31 to $0.33. The benefit of acquisitions already completed will be core to success. Shares will provide $0.23 to $0.24 based on an estimate of $600 million and repurchases in 2015 and the carryover impact of our 2014 repurchases. Interest, corporate, and the tax rate will be in the range of a $0.02 impact to a $0.01 benefit. In total, we now expect EPS to be $4.20 to $4.40, inclusive of $0.15 to $0.18 of restructuring costs. Incremental $0.05 to $0.08 of restructuring costs will mostly impact the second quarter. Regarding the second quarter, we expect revenue to be up 7% to 9% sequentially, largely driven by a seasonal increase in Refrigeration & Food Equipment and a sequential decline in Energy. With that, I will turn the call back over to Bob for some final comments.

Thanks Brad. Overall, I’m pleased with the way our company’s performed in the first quarter in the phase of tough markets. We continue to focus on lean and productivity initiatives across the organization. Through all of our actions, we have better positioned over for both our current demand environment and for margin enhancement over the longer term. With our strong free cash flow and the strength of our balance sheet, we have significant capacity to strengthen and build our position within our growth spaces. We remain focused on growth investment, as well as investment and productivity initiatives, including supply chain optimization and shared infrastructure. As I look beyond the current environment in Energy, I’m excited about Dover’s position. We have structurally improved our cost base while at the same time, continued to invest in product development and innovation. These internal initiatives when combined with value-creating acquisitions give me confidence that we will not only leverage volume improvements but also deliver very strong performance. With that, I’d like to thank our entire Dover team for their continued focus on serving our customers and driving results. And Paul, let’s take some questions.

Thanks Bob. At this point, I would like to remind all our listeners to limit yourself to one question with a follow-up, so we can get more people in the queue. And with that, Angie, if we can have our first question.

Your first question comes from the line of Nigel Coe with Morgan Stanley.

Thanks. Good morning and thanks for detail around the energy markets.

Good morning to you, Nigel.

Good morning. So, Brad, you provided some color on 2Q sales, which is helpful but any interesting to call out in terms of the margin and particularly with -- in terms of Energy and also the impact of restructuring payback primarily?

Okay. So, you were asking about -- okay. So Q2 margins -- we really not going to get into a discussion on it. But as far as the year is concerned on Energy, we would see the margins continue improve throughout the year as those restructuring benefits begin to take hold. As we said, Q2 will be impacted by further Energy restructuring costs. By the time we exit, we would expect our decrementals in energy to significantly improve. So the first quarter, the decrementals were about 39%. I would see decrementals into the second quarter slightly higher. Let’s say two points higher than that about 41% on Energy. And then for the year, we would see decrementals on our Energy business slightly below 40. We had previously thought that would be somewhere between 30% and 35%, but you know, Nigel, the steepness of the curve and the downturn has been significant. So getting to cost out and holding to those lower decrementals is a challenge right now.

Right, right. Exactly. So I’ll leave energy that I had. I’m sure other people will come back to that. In terms of refrigeration, obviously a lot of your competitors have been calling out it trends well. So I’m just wondering, I understand some of the commentary around the customers but it seems like a general market pause here. So I’m just wondering what is your perspective on what’s causing this pause? What gives you confidence, it’s going to come back and can you maybe just talk about market share as well? Do you feel you hold market share here?

Nigel, hi. This is Bob.

Hi Bob.

I’m going to add -- I'm going to take you question but I’m going to add something to your earlier question on the energy margins. I will tell you that with everything we’re working on with all of the cost takes out that the teams are working on with all of their product development activity that their teams are working on and the opportunities that they think they have in front of them here over the next two to three months, our objective is to exit the year with something very, very close to 20% operating margin. That’s not the second half. I’m saying exit the year. So I’m really speaking to the fourth quarter. And I think we have a lot of confidence not just here with Brad and myself but with the business team leaders that we can do that with an energy. Refrigeration, I’m -- I have been sort of restrained on talking about this over the past year. But I need to take the refrigeration story back to about this time last year, the April-May time last year. And we received notice from Wal-Mart, who has been a very, very significant and good customer for Dover and for Hill PHOENIX and for Anthony for several years that in their global bid, we were not going to participate in their next cycle for their large format stores. That is starting to show up in our first quarter, first half 2015, full year revenue and order activity. Nigel, the impact of that, it’s -- first off, it’s not all of the business that we enjoy and appreciate with Wal-Mart. I think last year we did about $300 million with Wal-Mart. But it does have an impact on this year’s revenue load with Wal-Mart of about $100 million. We have known that since last spring. We were not sure of the timing of the cutover or the transition and we’ve been working pretty feverishly within the business to back fill and to capture additional market share from other national and regional accounts and we feel good with that progress. But the impact in 2015 on a refrigeration segment is about $100 million reduction with Wal-Mart activity and we feel that we have back fill that with about $60 million to $70 million of new business that we have captured year-to-date though it’s not showing up in our order rates.

Well, thanks Bob. That’s great color. I’ll leave it there. Thanks.

Your next question comes from the line of Andrew Obin with Bank of America Merrill Lynch.

Good morning guys.

Good morning Andrew.

Good morning Andrew.

Just a question on pumps. Just want to understand what these delays have to do. I guess, you mentioned chemicals from the guidance that seems that you guys fully expect to get it back, just would like to get more color here?

Okay. First, I wouldn’t use the word delays. Part of the tough comp and I think that’s what you’re referring to in the first quarter is that we had significant project shipments in the first quarter. And if you go back and look at our notes, the notes in the script from last year, I think Brad we may have reported organic growth last year in the first quarter of 12% to 14%. And we told you then it was significantly boosted by project shipments with a couple of our businesses. It sort of -- we went back to -- I think 1% or 2% organic growth rate in the second quarter of last year. And you really have to look at the two quarters as an average to get a feel for the typical run rate for the pumps businesses. You are going to see that again in the first half of this year only it’s flipped. Lower organic growth rates in the first quarter against their tough comp last year. And you’ll see a much higher organic growth rate out of the fluids business and our pumps businesses in the second quarter of this year.

Got you. So when you say…

It’s simply is just a timing of project shipments. I’m sorry. Yeah.

Got you. That makes perfect sense. The other question I had, a lot of companies are sort of talking about this CapEx delays, sort of, global CapEx delays this quarter. Yet if I look at your printing and ID business, it seems to be doing quite well. Can you just talk a little bit more about this dichotomy between CapEx and maybe something more consumer-driven spending that you were seeing?

Well, I think that -- I think you just summarized the difference. I wouldn’t label the bulk of our product -- of our printing and identification business as CapEx. So a piece of it, especially within our digital print business is surely there. But bulk of it being Markem-Imaje, we would not label as typical CapEx spend. It really is an operating expenditure with our customers. We had very strong organic growth in the quarter in that platform 8%. It was across the board with all three businesses. In fact, I think Markem-Imaje, which is obviously our largest business within that platform was 6% organic growth for the quarter. So which -- good quarter and we expect it to continue for the year. We think that’s a very solid business for us for this year.

Thank you very much.

Your next question comes from the line of Steven Winoker of Bernstein.

Thanks and good morning.

Good morning.

Just on energy, what rig count assumptions are baked into your revised guidance now?

Lower than they are today.

Okay.

We have -- let's say as we said here, as we said here in the call, I think the latest data point I have quoting, Steve, I’m quoting a U.S. number. I think as of last week, the U.S. rig count was down to 9.50 or 9.54. While a much, much sharper, steeper decline over the last four months than we anticipated three and four months ago. I don’t know where it’s going to bottom out. I don’t think anybody does. We feel fairly -- we feel very comfortable with forecast we have for energy for this rig count to go a bit lower. I think I will tell you that if the rig count does pierce below the 900 level, we have additional actions that we need to take beyond what we have contemplated so far in the second quarter. And we will take them.

Okay.

But our -- we feel comfortable right now with the plan we have -- with the plan we have in place and the actions we’ve taken over the previous two quarters, the actions we’re taking here in the second quarter, we feel pretty comfortable that our businesses are right sized to deal with the 900 level or perhaps a bit lower if it pierces that significantly, we have other actions we need to take.

Okay. And then on pricing, we’re hearing from a number of your peers about pricing pressures from both currency as well as of course in energy that are on the way. And how are you guys thinking about it and seeing and dealing with that?

Okay. I have to -- I confess I missed the first part of that question. Can you repeat…

I’m asking about pricing pressure that we’re hearing from….

Pricing pressure.

…that we’re hearing from your peers…

Yes.

…about and whether or not you are -- whether or not you are seeing anything yet and even if you’re not, you are anticipating it, how are you dealing with it, both currency and energy driven?

Yes. We are experiencing it, and yes, we continue to anticipate it. I think, everyone, all of the supply base and the -- especially here in North America in the oil and gas market has dealt with, I will use the phrase either price pressure to significant price pressure over the last three or four months from especially the important customers, our larger customers, we’ve dealt with it, we deal with it on a -- in an account sometimes even a field-by-field basis. And it is -- the type of discussion we have varies significantly from product line to product line. And the -- in the first three or four months of this year we have seen more engaging discussions and you could interpret engaging as you wish, but we've been incurred more engaging discussions around our PDC inserts in our Sucker Rod products, more so than some of our other products. We do have price concessions still to be negotiated in our forecast for the year. But I think, the experience we had in the first quarter gives us some confident that we can deal with them and still exit the year at a something close to a 20% operating margin for our Energy business. To size this for you, I think, in the in the first quarter it was, Brad, somewhere around 2% for the segment and -- this is not a product commentary, this is a segment number about a 2% price impact for the segment in the first quarter. And for the entire year we are fully prepared to deal with a 3% to 5% price concession and it is in our forecast.

Great. Very helpful. Thank you.

Your next question comes from the line of Shannon O'Callaghan with UBS.

Good morning, guys.

Good morning, Shannon.

Hey, Bob, you said the second quarter would be the lowest revenue of quarter for Energy, is that sort of the end of destocking or seasonality or any other reason you feel like at the bottom?

Yeah. I am going to label it as the destocking impact more than the seasonality of the business, Shannon. I'm -- I would say that for both our PDC inserts, as well as our Sucker Rod business that the destocking we believe we'll see the bulk of the destocking activity occur between February and May. In fact, some of our customers are signaling now pretty strongly that the second quarter will see the end of their stocking activity.

Okay. Great. And then it sounds -- yeah..

It’s been insignificant. And I’ll give you one example, Shannon. It's probably been most prevalent within our PDC inserts business. In fact, the first quarter our revenue with our PDC inserts business was down 43%. And I think about two-thirds of that was related to reduce activity in the oil and gas markets here in North America. I think the other one-third was destocking. I think we'll see that continue during the second quarter. But I think by the time we get through the second quarter that we will see the disappearance of the destocking activity in the second half of the year.

Okay. Great. That's helpful. And then, in terms of capital deployments, you sound pretty optimistic about some deals in the second half of the year. Any color there on sort of magnitude a focus areas of what you are looking at?

Well, so you noticed my comment was in the second half of the year, not the second quarter. So, obviously, nothing is close to closing right now, so I'm going to defer any specific color and size comments perhaps until the July call. We are fairly -- we’ve got a fairly active pipeline in three of our four segments, the one being absent is Energy and it's not that we would not be interested in adding to a couple of product areas, especially around automation. But the -- I would say, there’s been a scarcity of attractive properties and businesses that have come to market here in the first four or five months of the year.

Okay. Great. Thanks a lot guys.

Your next question comes from the line of Jonathan Wright with Nomura Securities.

Hey, guys. Thanks for taking the call.

Good morning.

Can you just talk me through on restructuring size for Energy? How’s this playbook evolve, can you talk through, what the first place you go to in 4Q, is it way you look to expand that through the course of the year, just closing service facilities, how do you -- where would you go as the sort of downturn evolves?

Okay. So you want me to go back to the fourth quarter.

Well, just talk through the, what’s the initial response than incrementally what can you add on to take cost out of the business?

So let’s say from the beginning of the fourth quarter through the end of the first quarter headcount reduction within Energy is slightly over a 1000 employees and I don't have the exact number. But I do know it's like 15.5% of our employee base that existed at the beginning of the fourth quarter. In the early days and I would label that as a fourth quarter most of those headcount reductions, I would say, were, well, like not all hourly, but it was really related to reducing output capacity that we were anticipating. So let’s call it variable type of activity. And we’ve seen a much healthier -- heavier load here in the first quarter on SG&A. The one thing we haven't touched yet and I want to emphasize this, I want to emphasize both parts of that statement. We haven’t touched and then yet is product development in R&D. And we have been, I have been, we’ve all been rather moved to reduce the ongoing product development and innovation work we are doing within, within these key businesses. As I mentioned earlier, if we see rig count prepares the 900 level and drops significantly below that, then I would say we start to look at some other cost decisions that up until now I have, we have been reluctant to pursue.

Okay. Great. That was perfect. On the Fluid transfer size, I think sales growth adds, still looking very strong. Is there any risk to OPW from the four O'Neil pricing, some of that railcar business, is there any change in customer behaviour within the Fluid transfer fees?

Yes, a little bit, we have. I don't remember now the exact numbers but we actually have taken down our expectations in the second half of the year on our -- both our over the road as well as rail cargo activities that’s related to rail transport. It's not a significant piece of our business. In fact, I would give you this data point for the entire segment, not just fluid transfer. This is for the entire segment of Fluids. About 10% of the Fluids revenue is exposed to let’s see -- I guess the right phrase here is oil and gas oil & gas upstream CapEx activity. And that 10%, it’s about half in North America and about half outside of North America. We have seen a little bit of that decline, especially within our pumps business in the first quarter. We think we’ve had that decline appropriately sized and anticipated for the balance of the year. But even with that, we see strong growth potentials in some of our other markets and verticals. And we’ve got a fairly health organic growth rate, not just for fluid transfer but for the entire segment, for the year. We feel pretty comfortable with this segment.

Thanks. Great. Thank you, Bob.

Your next question comes from the line of Julian Mitchell with Credit Suisse.

Hi. Thank you.

Hi Julian.

Hi. You called out mix as a margin headwind in all the segments except Engineered Systems. I guess within Fluids and Refrigeration & Food Equipment in particular, how quickly do you think that mix headwind on margins can reverse?

Well. Okay. Let’s deal with it, I guess specifically within Fluids. Brad may be able to size this better than I can. I’m sitting here doing just for recall. But the mix would be yes. The margins were down a bit because of mix. But we are not talking a 150 basis points or anything think like that. I think we are talking maybe 20 or 30 basis points on mix, so it was rather modest. And it will just -- it just work its way through the product line. There is nothing unique or nothing alarming in the first quarter activity.

I think it’s sort of a tough comp.

Yeah. It has a lot more to do with the tough comps from the first quarter of last year. But let me give you a commercial or an advertisement here for our performance in Fluids. Margins in the first quarter, I think were 16 in a fraction. Operating margins, we do have in our objective for the year, operating margin for the Fluids segment to be 20%. And we know that’s a tough reach for the business teams. But we believe we will be very, very close to the 20% operating margins for the year. And you are going to see some rather market improvement in margins from the segment, especially in the second and third quarters.

Great. And then just circling back to capital allocation, just the size of what you think you can spend. I mean is it fair to say that you are looking to deploy this year the free cash flow after dividend and the sort of $100 million or so extra from divestment proceeds? So that’s maybe $600 million plus you could use on deals in the second half?

Okay. Look, let me just tweak that statement. You should look at the share repurchase activity for this year. And my goodness, we’ve said these six times over the last two quarters that the number will be $600 million. It’s primarily being funded by divestiture of the two businesses that we have announced here in the first quarter, one that’s closed in the first quarter and the second one that will close here sometime in the next few weeks. So that’s really funding the share repurchase activity. So after CapEx and after dividends, we still have a fairly healthy cash flow that’s available for M&A allocation for the balance of the year. And Brad and I will go in a room and arm wrestle as to how much more he allows me to spend if the opportunities present themselves.

Great. Thank you.

Your next question comes from the line of Nathan Jones with Stifel.

Thanks. Good morning, everyone.

Good morning, Nathan.

Who usually wins the arm wrestle?

Bob does.

You have to understand. I’m right handed and Brad is left handed. We do arm wrestle with the right hand.

Just following on to your answer to Julian’s question that with the 20% targeted margins for Fluids from the year, 16 and a fraction in the first quarter, there looks to be some seasonality in the margins in 2Q and 3Q. But that’s a pretty healthy target. Can you maybe give us some more color on how you get to 20% for the full year?

Actually, there is a little bit of seasonality in the Fluids business. We typically see the second and the third quarters being the high revenue quarters for the entire segment and that will hold true again this year. So some of the -- some of it will come from growth and volume leverage, some of it is the increased revenue level we see in the second and third quarter. But here I’ve got -- I have to give credit here to the business team and to our segment leadership team, very, very focused on productivity and cost takeouts as we grow the business. And we are making very good progress there. There is no silver bullet. It’s just a lot of blocking and tackling and good execution on productivity.

So you would say then it’s primarily cost out and productivity improvements and that is things that are in your control?

Yes. The volume, the organic growth rate for the segment for the year is 5% to 7%. That type of volume on top of our productivity initiatives is a pretty powerful combination.

What’s your level of confidence that actually making that? I know you said it was a bit of stretch goal at actually making that 20% for the full year.

I feel fairly confident sitting here today.

Okay. Fair enough. If we just look at the drilling and production business again here, can you maybe talk about the difference in the pricing pressure at US Synthetic versus the artificial lift businesses given the steep decline in US Synthetic at the moment?

Well, it’s easy for me to give you the example for our PVC inserts because for all intends and purposes, it’s a single product business. You get into artificial lift and my goodness is that the product portfolio there is not just very broad from an application point of view, it’s pretty broad from a -- it’s even broader from a product point of view. I did state earlier that up until now we’ve seen the bulk of the price pressure and I’m not saying the bulk of the discussions but the bulk of the price pressure to be most evident around PVCs as well as sucker rods. And I would expect that statement to hold true for the second half as well.

Okay. That’s helpful.

I really don’t want to talk about the pricing on specific products.

Okay. And just a quick one for Brad, is there any of the step-up purchase price accounting left to get through and accelerated in the second quarter?

No. Mostly it’s behind us. Again, this was the inventory turn in the fourth quarter of 2014 into the first quarter. So that’s behind us at this point in time.

Okay. Thanks very much, guys.

Your next question comes from the line of Jeff Sprague of Vertical Research Partners.

Thank you. Good morning, gentlemen.

Good morning, Jeff.

Good morning.

Good morning. Just wondering if you could touch based a little bit on the change in automation. And I guess there is a couple threads to my thought, but we’re seeing these stories out of Baker Hughes and others about wells being drilled and not completed and kind of decontenting and the like. Is that what is going on with the automation business? Or is it just simply kind of the first rig count as we’re just catching up with the business?

Well, I think it’s both of those items. I see different statistics. The latest one I saw, I think over the weekend was an estimate that perhaps as many of the -- even with the reduced activity environment that we’re in that perhaps as many as 20% of the wells that were drilled in the first quarter are waiting to be completed at some future date. So obviously that has some impact not only on our artificial lift business but also on our automation business. There is a little bit of a detail here that I think is important to understand that there is one product area within our automation portfolio that I would label it as being down-hole. Everything else all over other product offerings and productivity packages and solution offerings are all top of well or field type of automation products and solutions. The one product that is down-hole has probably seen a decline similar to what I shared on the earlier question, similar to what we’ve seen with our PVC inserts, it’s in the 40% range, Jeff.

Clearly, I would add there, Jeff, that we thought this business would be more resilient because of the expectations around productivity at the wellhead and continued completions which …

And we still believe that.

And we still believe that and we just think it’s is a bit delayed.

We’ll see. It’s with the significant inventory of uncompleted wells. The one thing I will share with you Jeff is that we are not forecasting -- we are not forecasting a sudden surge in the second half of these uncompleted wells coming online to be completed. We have not forecast that with our automation business and we have not forecast that with our artificial lift business.

So that should imply that drilling should fall further, right if people are not going to…

No doubt, but I will tell you. Brad made a comment that our energy segment in the second quarter will be the low quarter of the year. And from a revenue perspective, we see a further drop in the second quarter in both drilling activity as well as our artificial lift activity. That said because of the significant amount of destocking, we actually believe we’re becoming convinced that there is going to be a slight recovery. And I emphasize the word and I put it in caps, slight recovery in our drilling activity in the second half of the year. And I think it’s we just look at that as this destocking activity for PDC Inserts. Jeff, I cannot emphasize how significant it has been in the last couple of months. And further destocking anticipated here in the second quarter but we do believe it comes to an end here with the second quarter.

I think it’s been steeper.

Yes.

And more significant than what we saw during the recession time.

Correct.

And then attributable in my mind to this destocking, right.

And just a follow-up back to fluids then?

Back to what?

Back to fluids.

Fluids, yes.

Yeah. So in December you were guiding margins up 80 to 100 basis points and I’m not sure exactly what the date is, right? There’s a few things moving around but the organic growth, look it’s about the same. Can you just give us a little bit more -- I mean, you always have seasonality, right. I mean, what is that would drive such a step function change in your view on margins and fluid. And is 20% in your guidance or that’s an aspirational target?

I think embedded in our guidance is an execution on margins that is very, very close to the 20% number that I told you is our objective.

Yeah. its about of 80 basis point from give or take, 50 to 80 basis points from where we were in the last guide is really driven by -- like Bob said, execution and productivity initiatives. And we did take some restructuring in this segment and have been working on our cost for the last two quarters …

Even longer.

….little bit longer and I think that’s going to show.

Okay. Great. Thank you.

Our final question comes from the line of Deane Dray with RBC Capital Markets.

Hey, thank you. Good morning, everyone. I know we covered a lot of ground here. Just looking back, Bob, at your comments, I’d be interested in hearing any additional color regarding that last business with Wal-Mart. I know what happened a while ago but you gave us some insight there but maybe just reflect on why did you miss that business? Were there any lessons? And then the new business you’ve got, the $60 million to $70 million with those new customers. And just any kind of color there would be helpful? Thanks.

So to put it pretty bluntly, Deane, when we went through -- when our teams went through that global bid exercise and let say that would have been --and oh gosh, second half of ‘13 even though we were not informed of the customer decision until the spring of ‘14. We made a decision we did not want to chase the price down as low as the price was going. It was really that simple. It was not a product decision. It was not a feature decision. It was not a capacity decision and it was not a technology decision. It really was a pricing decision. I want to put this in a broader context here. I’ve shared with you what our objective is as we exit the year on margins for energy and I told you what our objective is for the year on margins for fluids. We continue to make very, very good progress within the businesses and the segment within engineered systems on margin improvement and this has been a significant discussion with the leadership teams within refrigeration and fluid equipment to improve the margins. And you’ll see a little bit of an improvement in margins with refrigeration and fluid equipment this year, I think we have more to do. And I would like to think as we go through. As we go through 2015 and ‘16, you will see us execute on that objective on margin improvements within refrigeration. And at the pricing level that was being offered or I would, maybe more appropriate put it at the pricing level that this order activity, this award was led at, we just found it unattractive.

That’s really helpful. Thank you.

We’ve already spent a lot of time for questions and answers. I would now like to turn the conference over to Mr. Goldberg for closing remarks.

Thanks, Angie. This concludes our conference call for the first quarter. And with that as always we want to thank you for your continued interest in Dover. And we look forward to speaking to you again next quarter. Have a good afternoon. Thanks. Bye.