Dover Corporation (DOV) Q1 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the First Quarter 2016 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 call over to Mr. Paul Goldberg. Mr. Goldberg, please go ahead, sir.

Thanks, Kristy. 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 comments from Bob and Brad on Dover's first quarter operating and financial performance and follow with our outlook for the remainder of 2016. We will then open the call up for 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, www.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 1-800-585-8367. When accessing the playback, you'll need to supply the following access code, 79357235. 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 statement. Also, we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. We would also direct your attention to our website where considerably more information on Dover can be found. And with that, I'd like to turn this call over to Bob.

Good morning, everyone, and thank you for joining us for this morning’s conference call. As previously communicated, our first quarter was well below our initial expectations, driven by significant further reductions in activity and capital spending within our U.S. oil and gas related end markets. These conditions primarily impacted our energy segment and to a lesser extent fluid. The market served by engineered systems and refrigeration and food equipment remained solid, resulting in an organic growth of 3% in each segment. In total, we delivered first quarter adjusted EPS of $0.52 until further steps to reduce our cost and right-size our businesses. In addition to introducing new products and pursuing share gains, we are increasing the restructuring actions and have stepped up our efforts on productivity, including shared services. Now let me share some comments on the quarter. From a geographic perspective, excluding our energy segment, our U.S. industrial activity remained solid and grew organically low single-digits year-over-year. Both our China and European markets were down sequentially and also down organically from the prior year. In energy, markets further deteriorated as we moved through the quarter. Market activity levels hit new lows on continued declines in the U.S. rig count and reduced capital spending, which in turn drove our first quarter revenue and earnings down significantly. Our teams have remained resolute on actions to drive sales and share gains and in reducing all non-essential cost, while still maintaining their engineering talent and ability to respond to customer opportunities. Engineered systems organic growth was 3%. Within printing and identification, we once again posted solid results in our core marking and coding business. And the industrial platform, organic growth was broad based. Fluids posted strong revenue growth driven by the recent acquisitions of Tokheim, Geller [ph] and Reduction. On an organic basis, our businesses with direct oil and gas exposure and those businesses serving integrated energy customers, especially within retail fueling posted declines. Our Refrigeration and Food Equipment segment grew 3% organically, largely driven by retail refrigeration. Revenue in earnings performance was as expected, benefiting from our customer expansion efforts taken over the last several quarters. Regarding acquisitions, we believe we have line of sight on several deals over the next few quarters and our key growth markets. Now looking forward, within energy as a result of further U.S. market declines, we have reduced our organic revenue forecast, which is now expected to be down 27% to 30% for the full year. On a sequential basis, the first quarter was down 12%. We now expect the second quarter to sequentially decline another 10%. In Engineered Systems, our expectations for organic growth are unchanged, driven by the leading technology and new products offered across the segment. We expect the marking and coding business to grow low to mid-single-digits and our digital textile businesses to have double-digit growth. Within our industrial platform, we expect modest broad based growth. Fluids will grow this year, driven by their recent acquisitions, which should generate roughly 400 million in revenue in 2016. We also expect solid to strong growth from our industrial hygienic and pharma markets. Overall organic revenue is expected to be a few points lower than previously forecasted, as a result of direct oil and gas exposure, lower CapEx spending for integrated energy customers and project timing. Finally, within Refrigeration and Food Equipment, our plans for organic revenue growth and margin improvement remain on track, heading into the seasonally strong second and third quarters. Our leading technology and merchandising solutions are resulting in customer wins at several regional and national food retail chains. In summary, we are lowering our full year EPS guidance to reflect the impact of oil and gas markets. Our full year guidance includes 40 million of restructuring costs, which will deliver significant benefits on an annualized basis. With that, I'd like to turn it over to Brad for further comments.

Thanks, Bob. Good morning, everyone. Let's start on slide three of the presentation deck. Today, we reported first quarter revenue of $1.6 billion, a decrease of 5%. This result was comprised of an organic revenue decline of 7%, and an FX impact of 1%. Growth from acquisitions of 6% less dispositions resulted in net acquisition growth of 3%. EPS was $0.64; it includes $0.05 of discrete tax benefit and a $0.07 gain from a disposition. Segment margin for the quarter was 11.7%, a 180 basis points below last year. Adjusting for first quarter restructuring of approximately $14 million, margin was 12.5%. Restructuring activities were primarily focused within our Energy and Fluid segment. Bookings decreased 4% over the prior year to $1.7 billion. Within this result acquisition growth of 4% was more than offset by the combined impact of reduced oil and gas market disposition and FX. Organic bookings in our Engineered System and Refrigeration and Food Equipment segments grew 4% and 5% respectively. Overall, book-to-bill finished at 1.03, up slightly from last year. Our backlog decreased 10%; to $1.1 billion and was down 6% excluding disposition. Free cash flow was $96 million, or 6% of revenue consistent with the prior year first quarter. We expect to generate free cash flow of roughly 11% of revenue for the full year. Now let's turn to slide four. Engineered Systems and Refrigeration and Food Equipment both increased organic revenue 3%. This increase reflects broad based growth of Engineered Systems and in retail refrigeration and can-shaping businesses of Refrigeration and Food Equipment. Fluids organic decline of 3% was driven by oil and gas markets and lower CapEx spending in select fluid transfer markets. Energy organic revenue was down 33% on further decline in the North American oil and gas markets. As seen on the chart, net acquisition growth was most prevalent as fluid with 22% growth, principally driven by Tokheim. Now on slide five. Energy revenue of $283 million decreased 34%, driving earnings down from the prior year to $11 million. Energy's results continued to be further impacted by declines in oil and gas markets fundamentals especially the U.S. rig count. Energy incurred an additional $6 million in restructuring costs. Since the beginning of the oil and gas downturn in 2014, this segment has reduced their workforce by 32%, or 2,100 people. Excluding the Q1 restructuring costs, our operating margin was 6%, reflecting volume and price decline. We expect to complete additional cost actions in the second quarter and exit 2016 at around 10% margin. Bookings were $273 million and book-to-bill was 0.97. Turning to slide six. Engineered Systems revenue of $577 million increased 1% overall, reflecting organic revenue growth of 3% and unfavorable FX of 2%, net acquisitions were neutral, where the acquisition growth of JK was essentially offset by the revenue connected with the sale of the business. Earnings of $94 million increased 6%, principally reflecting the benefits of productivity and organic volume leverage. Of note, $11 million gain on the disposition was principally offset by increased cost associated with a factory - of recent factory consolidation and other one-time items. Our printing and identification platform revenue of $240 million, increased 4%. Organic revenue was up 1%, primarily reflecting solid North American marking and coding market. Acquisitions at 8% growth, while FX was 5% negative. In the industrial platform overall revenue decline 2% to $337 million, where organic growth of 4% was offset by a 5% impact from a disposition and a 1% from FX. Organic growth was broad based. We incurred $2 million in restructuring costs at the quarter. Excluding the Q1 restructuring costs, margin was 16.6%. Bookings of $573 million was flat, reflecting organic bookings growth of 4% and acquisition growth of 3%. Largely offset by the impact of a disposition in FX. Organically printing and identification bookings were essentially flat and industrial bookings increased 6%. Book-to-bill for printing and identification was 1.01, while industrial was 0.98. Overall, book-to-bill was 0.99. Now on slide seven, within fluids revenue increased 17% to $399 million. While earnings decreased 16% to $46 million. Revenue performance reflects 22% growth from acquisitions partially offset by a 3% decline in organic revenue and 2% from FX. Our fluids transfer and pumps results reflecting impact of weak oil and gas markets, reduced capital spending and the timing of orders, partially offset by solid results in industrial hygienic and pharma markets. Lower organic volume, the impact of acquisitions and 3 million of incremental restructuring costs reduced margin 460 basis points in the quarter. Excluding restructuring and acquisition and related purchase accounting, margin was 17.5%, an increase of 70 basis points over an adjusted prior year. Bookings were $418 million, an increase of 23%. This result primarily reflects the positive impact of acquisitions. On an inorganic basis, bookings were flat. Book-to-bill was 1.05. Now let's turn to slide eight, Refrigeration and Food Equipment’s revenue was $363 million declined 2% from the prior year, and earnings with $38 million, an increase of 6%. Organic revenue growth of 3% was largely driven by wins at several retail refrigeration customers. We also had solid results in our glass door and can-shaping equipment businesses. Overall, the disposition of our walk-in cooler product line in FX impacted revenue 5% and 1% respectively. Operating margin was 10.5% and 80 basis point increase over last year. This improvement was largely driven by the benefits of productivity and leverage on organic growth. Bookings of $411 million were down 2%. This result reflects 5% organic growth offset by a 6% impact of a disposition and 1% from FX. Book-to-bill was 1.13, reflecting normal seasonality in the retail refrigeration market. Going to the overview on slide nine, let me cover some highlights. Corporate expense was $30 million and net interest expense was $32 million, both in line with our prior forecast. Our first quarter tax rate was 27.9% excluding this pretax benefit. Now moving to slide 10, which shows our full year guidance. As Bob mentioned, our 2016 revenue guidance has been lower to reflect the oil and gas markets. We now expect total revenue to decrease 2% to 5%. Within this estimate, organic revenue is expected to decline 5% to 8% a 4-point reduction from our prior forecast. We expect net acquisitions will add approximately 4% growth unchanged from our prior guidance. We now expect the impact of FX to be about 1% negative for the year. At the midpoint of our guidance adjusted segment margin is expected to be around 15%. Excluding restructuring costs and further adjusting for acquisition and purchase accounting, margin is expected to be around 16%. Our full year forecast for corporate expense, interest expense and the pre-discrete tax rate remains unchanged. Additionally, CapEx remains unchanged as does our full year free cash flow forecast. From a segment perspective, energy full year organic revenue forecast is now expected to decline 27% to 30%. We have also reduced fluids organic revenue forecast, which now expected to decline 2% to 5%. Engineered Systems and Refrigeration and Food Equipment is unchanged versus our prior guidance, net acquisitions remained at 4% growth. Turning to the bridge on slide 11. Let's start with 2015 adjusted EPS of $3.63. We now expect the year-over-year impact of restructuring cost to provide a $0.07 benefit, reflecting total 2016 restructuring cost of $40 million versus $55 million last year. Our revised forecast reflects $20 million or $0.09 EPS in incremental restructuring costs versus the prior forecast. Performance including changes in volume productivity, pricing and restructuring benefits will impact earnings $0.09 to $0.17. This is reduced from our previous forecast principally driven by the effect of lower volume. Increases in investment and compensation will impact earnings $0.19 to $0.22, reflecting roughly $0.07 of reduced spend. Acquisitions plus dispositions will be $0.16 to $0.17 accretive in total. This amount includes the operating earnings of acquisition plus dispositions and the related gain. The carryover benefit of prior year's share repurchases, the impact of interest corporate expense and the tax rate are all unchanged. Lastly, as I mentioned before, we had a discrete tax benefit of $0.05 in the quarter. In total, we expect 2016 EPS to be $3.51 to $3.66, down about $0.50 at the midpoint of our prior guidance excluding the gain on a disposition and discrete tax benefits. With that, I'll turn the call back over to Bob for some final thoughts.

Thanks, Brad. As we begin the second quarter, markets remain mixed. Businesses with exposure to oil and gas continue to be impacted by historically weak markets. Engineered Systems is benefiting from solid industrial end markets, healthy printing and coding end markets and a continued growth in adoptions of digital printing and global textile activity. Refrigeration and Food Equipment is also quite resilient due in part to their leading retail refrigeration technologies that helps our customers capitalize on the growing trend of selling prepared and fresh food. Within fluids, although it's early, we are very excited about the customer response to our recent acquisitions. Within retail fueling customers are now asking us to provide our full scope of products. We are also seeing revenue synergies at our plastics and polymer customers with the addition of gain [ph] and reduction. We will continue to execute on initiatives to help drive growth and fund investments, namely, launching new products across the entire organization, expanding our business with new customers and new geographies, leveraging or Dover excellence program to continue to drive margin productivity and cash flow. And capitalizing on a scale for the establishment of shared service centers. In all, leveraging these growth opportunities and executing on our internal actions will help to mitigate mixed markets, drive productivity and redirect resources to pursue growth initiatives. We also expect to fully leverage the recovery in our oil and gas markets, when it comes. With that, I’d like to thank our entire Dover team for staying focused on our customers. And Paul, let’s take some questions.

Thanks, Bob. Before we turn it back to Kristy, I just again like to remind you, if you can limit yourself to one question with one follow-up, that would be helpful. We have about 20 people in the question queue. So with that, Kristy, if you can give us our first question.

Thank you. Your first question is coming from Steve Winoker of Bernstein.

Thanks, and good morning, guys.

Good morning.

Good morning.

Could you maybe just start talking about the pacing of the energy revenue, as we move through the year, given the order dynamics, how long it takes to work through and the energy margin progression as well?

Okay, we’ll see, Steve I think in my script I commented on our sequential decline in the first quarter of 12% and that we are anticipating another sequential decline in the second quarter of about 10%. You look at the second half, the second half revenue is closely aligned with what we view as the run rate for the second quarter, and I would add one color comment on that. In the second half, we do have about 45 million of share gain revenue, sort of split evenly between the third and fourth quarter on wins that we’ve won and we have one at slide two, absent the share gain wins, the revenue in the second half would be modestly below the second quarter run rate. On margins for the year, margins are going to - I think, at the top end of our guide, margins are about 6% or 6.5%, all in, including restructuring. The restructuring activity is very heavily loaded in the first and second quarter. Second half sees the benefits from the restructuring activity and the absence of any new restructuring actions. And we do, our guide does show that we exit 2016 with an operating margin at energy, just about 10%.

Okay. And just to follow that up then, if conditions were not to get any worse at this point, Bob and Brad, at what point do you see - could you actually see the comps easing enough into next year that you’d actually be able to crossover in a positive territory?

Activity, if we were at the trough now and activity didn’t get any worst, but also assume that it doesn’t get any better than you could see the first quarter of 2017 having a revenue run rate slightly above first quarter 2016.

Okay. All right and while let me leave it there, given the number of questions. Thanks, guys.

All right. Thanks, Steve.

Thank you. Your next question is from Jeffrey Sprague of Vertical Research.

Good morning. Thank you, guys.

Good morning, Jeff.

Morning. I was wondering if you could address price in oil and gas, and also in fluids, it does look like you’re expecting pretty good drop through on your restructuring actions, just kind of look at the footnotes of your bridge here, what are you anticipating for price erosion in that guide and in that payback?

Okay. So your question specific to energy and then the follow-up was fluids?

Yeah, I think I'm not sure you've got price pressure elsewhere, but I think that was the point.

I would - for first quarter in energy, price was a negative 1% for the segment. Jeff, I would still tell you that in our guide, we still have a negative 2% to 3% price pressure for the year, but in the first quarter, it was 1%. The price pressure in fluids for the year is less than 1% or I'm going to say about 1%, I think it’s actually 0.9 to be specific. And then for the company as a whole, it's actually very, very slightly positive for the year.

That is a shockingly okay price down the number.

It's not that much different than what we experienced last year.

Yeah. So, people are behaving despite the volume decline on price.

Yes.

Again, I would tell you that I gave you a number on energy segment and I would repeat myself what I said last year several times. You will get an individual product lines, you are going to see different stories. We still continue to see price pressure in our rods business that's very similar to what we saw last year, in fact last year I think price down on the rods business last year I think it was 9% or 10%, that's not going to be as bad this year. But we're still going to see price pressure on the rod business this year. And then our diamond insert business, I think for last year, Brad help me here 5%, 4% or 5%, 6% last year and we are expecting another price down in our insert business this year of 3% to 5%.

So, you've got positive price elsewhere in energy, where we got the -

Bearings and compression.

Okay. And then just a quick one to shift gears. How quickly do you think you can ramp up Tokheim's exposure in the U.S. and where you're at on sourcing OPW through Tokheim and some of that vertical integration we are looking at.

The first question about Tokheim in the U.S., I'm going to differ a story on that until we get together at our Technology Day and what was it Paul, early or mid-June? We're still early days on the integration, the onboarding of this business and I think we'll have a better answer for you in June that I could give you today. But the integration of OPW and especially on the retail components business, the integration of OPW in Tokheim is moving along smoothly and the pull-through of OPW, I call it especially the hanging hardware is progressing as we expected. It's pretty positive.

Thank you.

Thank you.

Thank you. The next question is from Julian Mitchell of Credit Suisse.

Hi, good morning.

Good morning, Julian.

Good morning. My first question is just on the fluids guidance for the year on the revenue line. You talked in the presentation about the split between sort of solid industrial hygienic and pharma versus the oil and gas and energy stuff. In your full year organic guide now what do you - how do you split out the assumed revenue delta for each of those buckets in terms of oil and gas price -

I don't have that detail in front of me, Julian. But to give you a little bit of color, I did use the descriptive phrase solid to strong when I described industrial and hygienic and pharma. I would tell you that in the industrial part of the portfolio mid-single digit pipe of growth and the pharma and the hygienic more so in the pharma, it's - we're seeing double-digit growth in those verticals. And it's been both of those verticals have been areas we've focused on building our product portfolio over the last couple of years. But they are still relatively small. But I can't give you split for the year. I don't have that kind of detail with me.

Sure. And then, if we just look at the Engineered Systems business and the Industrial Parts of Fluids, was there any change in sort of customer behavior in recent months since the beginning of the year. Would you say it's been fairly steady?

Well, within Engineered Systems, the comments would be slightly different between the printing and ID platform versus the industrial platform. I don't think there has been any changes in the industrial platform. In fact, my comment in the script was that we had good organic growth in our first quarter, in our industrial platform, and you know that I did not call out a single business or two. Like I have done in the past. The growth in the first quarter was very, very broad based in the industrial platform. Within the printing and ID platform, Markem-Imaje, I think organic growth was 3% or a little bit better 3% and 4% fairly solid, right on our expectations, interesting, the strong market was not just the U.S. I would call it the Americas. We had strong growth from Canada through Brazil, but the entire America scheme did a very good job for Markem-Imaje in the first quarter. Little bit lower growth in Europe, but it was still positive. China was a challenge. Now I'll answer your question about profile, I will tell you that and I think I shared this on a call or two last years with respect to both Europe and China. We continue to see a slowdown in a deferral and a longer sales cycle, both in Europe and China with respect to orders that are for what I would refer to as capital goods. If it's for operating type of expenditures that products that we're selling to our customers that activity seems to be holding up fairly well.

Very helpful. Thank you.

Thank you. Next question is from Nigel Coe of Morgan Stanley.

Thanks. Good morning.

Good morning, Nigel.

Yeah, just a couple of quick questions on segment margins before broader question. Just may be Brad or Bob fluid margins - okay. So fluid margins also impacted by Tokheim accounting this quarter. Can you maybe just size that for us? And also the gain on disposition, did that fall into the ES segments?

Okay, Brad can give you some detail, but I am going to enjoy giving you a quick response on the fluid margins, Nigel. If you strip out the acquisitions from out of the fluid segment that we completed in 2015 and then Tokheim in January of this year and just look at the core business. We actually had slight margin improvement year-over-year in the first quarter. I think maybe it was modest, but it was still an improvement, I think it was 30 or 40 basis points improvement in the core operating margin. But obviously the acquisitions are coming on board with lower margins than the core and then we have the purchase accounting on top of that. But Brad can probably give you additional color than that.

Well, the only thing for the first quarter I would add that you know not having the numbers on top of my head right here. We had in the ES about, I don't know about 7 million or so restructuring cost, if I remember correctly. If I adjust for that restructuring cost and I adjust for then the deal, the margins, the margins and fluids would be about 17.5%. So, we can do the math on that and figure out what the delta is on with respect to the acquisitions.

Okay, that's -

Your other question was on the disposition?

Yeah, that - yes.

Yeah, that was within the industrial platform of the ES and I think the gain that we, I think we commented on this in the script. I think the gain was $10 million or $11 million.

$11 million.

$11 million.

Okay, great. And then just Bob, Energy have plus and minus 10% or more organic growth declines for six of the plus eight years and it looks like next couple of years you're going to have strong double-digit growth -

You mean six of the past eight years.

Past eight years, no eight years if you get back to 2009.

Yes, okay.

Yeah, so I mean, I understand the cycles up, cycles down, but given us the account - is that we have to live with and still remain the growth platform going forward or how you're thinking about energy as part of Dover going forward?

So, the question is around margins. Let me just - you'd have start you're going to look at it over a longer period of time looking back, you have to start by understanding the effective product mix and acquisitions on the segment margins and I am not just talking about purchase accounting and amortization. But the pure business profile of the acquisitions that we've made over the last four or five years, you go back to 2008, 2009, the two primary businesses within our energy platform as we’ve reported today would be our artificial lift business and our diamond insert business, both of which have margins then and up until 2000 - up until the last, you know, up until the last nine months have had margins higher than the businesses that we’ve been acquiring. So the mix has changed rather significantly, it’s rather difficult to compare the business - the business margin profile of even prior to the downturn even in 2014 to the business profile we had in 2008. And if you wonder have Paul walk that through you on the call later then he'll be glad to do that.

Yeah. Okay. Thanks a lot. There was no really margins is more typicality of the business, but I’ll follow up offline. Thanks Bob.

Thank you. Next question comes from Shannon O'Callaghan of UBS.

Good morning, guys.

Good morning, Shannon.

Hey, it’s a follow-up may be a little bit on Nigel's fluid margins question, if we just think about kind of the margins from here in fluids versus the first quarter run rate, I mean, is all of that acquisition impact, is that just normal like ongoing acquisition accounting or was there any stuff that hit more in 1Q that's going to ease through the year or should we - or this kind of a good all-in one run rate, if we just adjust for the restructuring?

No, I would say that there is, the answer is typical, there were three acquisitions, we have quite a bit of impact related to inventory turnover in the first quarter that doesn’t continue beyond that, but you do get the normal amortization of the goodwill in the intent, actually the intangibles. So the inventory piece, you know, I would say the first quarter is being impacted by roughly $6 million or $7 millions of inventory, and that doesn’t repeat itself into the second or third, fourth quarters. And then if you think about margins as well on restructuring, we said restructuring was going to be $40 million. If you think about how that’s going to get spend, we had $14 million or so in the first quarter, I would expect by the time we finish the second quarter we'll be about $35 million or so about $40 million spend. So, again as I start to look at first half and second half even for the company, you know, the first half, second half is not traditional what I would say is the split between first half and second half at $48 million to $52 million which it’s showing up in guide rate now was about 43% ,47%, $57 million, but if you adjust for these one-offs that you’re asking about and restructuring and then relook at it at that level, it has closer to 45%, 46% first half.

Okay. That helps. And then just on, Bob your comment on sort of energy being positioned to fully leverage any ventral recovery, price hasn't actually seen that as bad as Jeff was saying earlier, headcounts now down 32% and we’re going to be, hopefully exiting the year around of 10% run rate, so what is that mean, in terms of fully leveraging a recovery, I mean, in a positive scenario, I mean, where do you really think you can get this energy business back to margin wise?

Again it’s - you tell me what - if I knew what the volume was going to be next year Shannon, I can tell you - I could give you pretty good guess what the margins were going to be, it is very volume sensitive. We commented on the margins that we don’t - the EBITDA numbers are obviously in our filings, but even as we look at our energy segment as - if we close - if we exit the fourth quarter with a 10% operating margin run rate, Shannon, our EBITDA on that business is about 20% in the fourth quarter. And what we have tried to protect very diligently and I commented on the script as well, is our engineering capability and our ability to respond pretty quickly. So when I say we can take advantage of the recovery and leverage the recovery well, when it does come, part of its around our response capability, but we have taken enough fixed cost out of this business in 2015 and 2016, that the incrementals on our volume increase are going to be rather impressive.

Okay. Thanks a lot, guys. Appreciate it.

Thank you. And as a reminder, we do ask that you limit yourself to one question and one follow-up. And your next question is coming from Steve Tusa of JP Morgan.

Hey, guys. Good morning.

Hi, Steve. Good morning.

Just I guess a lot of numbers floating around here. For the second quarter, you guys I think you've reached - the numbers have changed a bit, but last year I think it was up EPS wise 30% to 35% from first quarter to second quarter. I'm not even sure what number we're using like let's just use I guess the $0.52 number or maybe like $0.55 to $0.60 number. Because there was a lot of moving parts here. But is second quarter going to be better sequentially than last year or because of the energy dynamics, although small impact now or worse than it was last year seasonally. What's kind of a seasonal color, when you kind of mix this all in for the second quarter?

Well, okay. I understand the question. I haven't done that calculation Steve.

Well, I hate to say it's just a question that if you have a view on, if you know what the second quarter is, what is that roughly year-over-year versus the first quarter that’s kind of the baseline question.

I actually don't have the detail in front of me, Steve. I'm taking the guess to even try to answer that.

Yeah Steve, it's Paul. I would just say that the three segments, Engineered Systems, Fluid and Refrigeration and Food Equipment are clearly are going to be improved sequentially second quarter over first quarter. Bob said energy is going to be down 10% sequentially. So the EPS in the second quarter is going to be substantially above, where we are in the first quarter, but we don't give second quarter guidance.

Okay. And I guess you guys talked about the energy margin. I assume the energy margin given the revenue decline and as you talked mostly about the back half waiting of, I mean as restructuring coming through et cetera. I assume the energy margins is going to be down in the second quarter.

We'll actually all in. I'm not sure that's true Steve. All in the first quarter including I say all in including restructuring charges, I think margins were 4%, 4.1% something like that. We actually do start to get some benefits in the second quarter.

Okay.

So from those restructuring activities that we're for the most part absent in the first quarter. Because Steve most of the restructuring we took in energy and the first quarter occurred in March.

Okay. And then one last question just on the --.

I actually expect margins in the second quarter and energy to be a bit better than the first. We actually took out 366 ads in the first quarter in energy. And most of them - in March.

So you will see that impact into the second quarter.

Okay. And then in energy just a follow-up to Nigel's question. I think what he was trying to get at was not necessarily the margin, but just the cyclicality of the business. Is there any part of that business may be drilling perhaps that's going to be little more challenged over the next couple of years? Any parts of those businesses that are up for strategic review and potential divestiture. Obviously you're not going to do the whole segment but are there any parts of that drilling specifically that you'd evaluate as being strategic or non-strategic for the longer-term?

Good question. And it's something we look at. We something we look at every year not just on energy. But beyond that I'm not going to comment.

Okay. Thanks a lot.

Thank you. And next question comes from Andrew Kaplowitz of Citi Group.

Hey, good morning, guys.

Good morning.

Good morning.

Good morning. So I'm trying to reconcile the EPS of sets of acquisition in 2016. You have $0.16 to $0.17 for the year. You've talked about this little bit in your prepared remarks, but you have $0.18 last quarter. But your numbers now include the $0.07 gain from the disposition. And then of course it also includes the earnings from the disposition of the loss of earnings. So can you talk about how are your acquisitions trending? I know it's early but are they lower than you thought in terms of EPS contribution or the same or maybe a little more color there.

Sure. So you're right. And then last forecast we had a roughly $0.18 from acquisition accretion. Where we're stand today in our forecast, we're at $0.19. So roughly it's the same number let's say at that way. So they're trending fine, some are little bit better. Yeah one's up a penny one, there is no big changes, pretty consistent from our last forecast and the way you reconcile it, you get - you take out the gain that to your point and you add and you also have to, you add back the gain and then you subtract out the lost revenue and earnings of the disposition and that’s about $0.09 or so.

Okay. That’s helpful. And Bob maybe I can ask you specifically about the fluid transfer business if I look at that business it did turn down a little bit you mentioned oil and gas you mentioned lower CapEx spending you didn’t specifically talk about OPW that seems fine, but maybe just a little more color on that business, what turned down in that business?

So, the OPW first quarter was lighter than we expected and in the first quarter, the softness was almost all, not entirely, but almost all in the retail area. Activity in Canada, our retail fueling was significantly below expectations and even our experience from last year thus the comp part of the reason why I have to comment on the integrated energy companies at least, those are some of our customers in Canada, but we also saw some project timing for shales from the first quarter to second and third from some U.S. retail customers who are pushing out some rebuild projects.

So, Bob how do we look at OPW for the rest of the year then how do you look at it?

I would say for the rest of the year, our expectation is it’s going to be less of a call it a negative year-over-year comp in the second quarter and we’re actually feeling fairly positive about by the second half of the year.

Okay. Thank you.

Thank you. Your next question comes from Dean Dray of RBC.

Thanks. Good morning, everyone. Hey Bob, hope you give us some color on the - in refrigeration those retail wins you had in the quarter and how does that compare to any sort of seasonal expectations?

Are you asking it for the customer names, I'm not going to do that, Dean?

I did not ask for customer names but just some color as to what kind of customers or what kind of products?

For those of you who recall that my comments in the first half of last year on refrigeration what we’re seeing in the fourth quarter and the first quarter was actually what we were expecting to see in the second quarter of last year, it just took us longer to get to this point. As you know, we did take a significant drop down and the step down in the Walmart business and the efforts by the leadership team and the sales organization in Phoenix has been outstanding over the past year to deal with the shortfall and they are covering it. They’re covering it Dean, they’ve done a really good job. In fact I would say that the organic growth for the segment in the first quarter just slightly above 3% was actually about a point better than we expected coming into the year and all of that upside was that of our refrigeration business, primarily, but not all, primarily Phoenix and we feel very, very good with the factory load we have right now for the seasonally strong second quarter and the teams are working pretty feverishly and making sure that we can make that same comment as we entered the third quarter. We actually feel pretty positive right now about the seasonal load that we’re looking at here in the second and third quarter.

And just to clarify so on that filling the Walmart hole, these wins you had they were new customers and that would be considered part of that initiative that you talked about last year about --?

No the customers Dean, there’s a handful of new customers in there a single handful, but some of it is just winning larger share.

Got it. And then just a clarification on -

I would like to cover a point here Walmart activity is still not where we would expect it to be even in the remodel activity, the first few weeks of the year were actually pretty modest compared to our expectations. March was sort of back on track. But this is a bit of a different year for Walmart. With respect to communication to at least us and to other suppliers that we're aware of is that they have not announced to their supply base a detailed roll out of remodel activity for 2016, it's sort of being done in month or two at a time.

Got it. And then just…

For the year.

Just to clarify on the incremental restructuring that you've announced today. What's the implied payback and you called out the shared service centers a couple times, is that a permanent change and how does that contribute on the cost equation?

I'm going to have the Brad on the payback.

On the restructuring. So let's just cover that for a moment. We said incremental 20 million for total of 40 million. So if you think about what we had in terms of benefits in our last forecast where we are today. The benefits on the 20 million incremental spend is up 50 million. I know that sounds like a big number. But in that 50 million I would say 50% of that is right sizing manufacturing so that hourly work variable cost and the other 50% is attribute to structural type of cost take out and so that's what we have in our forecast. So again some of the you'll see the foot note on one of the charts that 100 million now and the aggregate includes we include all in when we say the headcounts are down 366 heads that's also manufacturing and management and overhead type layers as well.

And the shared services prior the structural change?

Well, yes or no, I mean it's not part of a restructuring activity per se. But it surely is a structural change that we are pursuing here at Dover. We've been running pilot programs where two full years now and this year we sort of announced here internally a couple of months ago the role out of the shared service approach around Dover and it's more than just back office. It encompasses from activity around HR some like activity around finance and accounting. But it's more than just accounts payable and accounts receivable it's much more expensive. And I think actually by the time we get the year end 2016 we'll probably we'll have one segment pretty much fully transition to shared service approach and the other 3 perhaps 30 to 50% transitioned to the shared service platform. We are not - in our guide there has actually no benefits, not net benefits in our guide this year from the shared service roll out. We've got some spending and some investment that we are making this year, we are seeing some benefits. But that's not going to be a net benefit. We'll actually start to see the net benefits of this program in the 2017 and 2018.

Thank you.

Great.

Thank you. Our final question is coming from Joe Ritchie of Goldman Sachs.

Thanks. Good morning, guys and thanks for fitting me in.

Good morning, Joe.

Maybe just on that payback question, I think the genesis of the question is a fact that when you take a look at your payback and what you are spending from a restructuring standpoint it looks pretty like really good payback relative to what other industrial companies are seeing. I guess maybe the question is one what gives you the confidence that you can get that payback and then secondly are there any obstacles that you see as you are rolling out your restructuring programs that would potentially inhibit you from saying that same type of benefit.

Okay. So first-of-all all restructuring activity is not the same. The bulk of not all, but the bulk of the restructuring activity we’ve had and energy both last year 2015 as well as the first half of this year has been people related and my goodness Brad, can I say almost a 100% domestic, maybe almost a 100% North America for sure. And Joe the payback on that is pretty high pretty quick. When you peel off the labor restructuring, the workforce restructuring you look at some of the fixed cost or facility consolidations we did last year and are doing again this year. In a waiting perspective they are pretty minor compared to the benefits we are getting from the workforce reduction and the payback is longer probably more in line with what you are referring to here when you look at the facility consolidations that we have done. But again, most of the work force reduction last year and this year has been North America.

Okay. So I guess the confidence in set in other way your confidence is pretty high - there, okay. And then may be one follow-on question…

May be I will get you a very discrete example Brad mentioned that in Energy in the first quarter workforce was reduced by 366 they are either here or not and when they are not I mean the benefits I mean it is a pretty high comfort on that.

Okay, fair enough. And then I guess, I guess the follow-on question there is really since may be focused on Energy for a second. I remember several quarters ago we talked about additional restructuring actions potentially impacting your service levels and yet you know we have seen that there is no restructuring and actions that are needed to be taken on the Energy side of your business. I guess, I am curious, how are you managing that piece of your business and make sure that service levels are interrupted and when we do see recovering?

So like I commented both on the script and in earlier response, we have as good of a job as we can be holding our engineering capability. In fact, I would say at last year in 2015 we actually added resources in engineering. The 2016 we have tweet a bit around the edges on our service response but we have done it, in a way that we know we have got flexibility to move resources around to handle customer demands today, tomorrow and hopefully here whether it is the second half of this year and next year when you start to see a little bit of the recovery. But we have tried very diligently to protect our response time even though we have then sort of trending at the margins. To that point Joe, I am going to tell you, I do not see a lot more flexibility in the second-half of his year or even going in the next year about restructuring activity at Energy that is in line with what we have done in the second-half of last year or in the first quarter or the second quarter of this year. If there's further revenue declines I think we can always find opportunities at the margin but I am not just being very upfront, I do not see the opportunity to take another $30 million of cost out of Energy in the second-half of this year even if we see a little bit of decline in revenue.

Hey, that's helpful. Thanks, Bob.

Thank you. That concludes our question-and-answer period. I'd now like to turn the call back over to Mr. Goldberg for closing remarks.

Thank you very much. We just like to thank everybody for their continued interest in Dover. And we look forward to speaking to you again next quarter. Have a good day. Thank you. Bye.

Thank you. That concludes today's first quarter 2016 Dover Earnings Conference Call. You may now disconnect your lines at this time. Have a wonderful day.