Dover Corporation (DOV) Q2 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Second Quarter 2017 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 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.

Thank you, Stephanie. Good morning and welcome to Dover’s second quarter earnings call. With me today are Bob Livingston, Dover’s President and Chief Executive Officer; and Brad Cerepak, our CFO. Today’s call will begin with some comments from Bob and Brad on Dover’s second quarter operating and financial performance and follow with an update of our 2017 outlook. We will then open up the call 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, investor supplement and associated presentation can be found on our website, dovercorporation.com. This call will be available for playback through August 3 and the audio portion of this call will be archived on our website for three months. The replay telephone number is 800-585-8367. When accessing the playback, you’ll need to supply the following access code, 43265543. 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 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 can be found. 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 second quarter reflected the continuation of a trend that began to develop late last year, namely, improving global markets and strong results reflecting solid execution by our teams. These factors resulted in revenue growth and margin expansion that exceeded our forecast. All segments posted sequential margin improvement, most notably, in refrigeration and food equipment, and in fluids. And these segments, our work on integration, productivity, and commercial excellence resulted in improved performance in the quarter. Overall, our segments performed at a high level which we expect to continue. We are raising our full-year guidance for revenue and EPS reflecting our strong second quarter results and our increased confidence in the back half of the year across all segments. As we highlighted at our June Investor Day we expect strong performance over the next few years in both organic revenue growth and margin expansion. Delivering on our 2017 commitments is a critical step towards achieving our three year plan. I’m pleased to say we are executing well on our revenue growth and margin expansion activities. Our work on involving the portfolio over the past several years is yielding tangible benefits. It has been a steady and purposeful transformation as we have focused on building great businesses. With 60% of our revenue from businesses that hold a Number One or Number Two market share, we have built and expanded the leading positions serving growth markets through platforms like marking and coding, fueling and transport and pumps to name just a few. We continue to have significant potential to expand revenue and margin as we apply our operating model to improve every business and use inorganic investment to strengthen our businesses even further. With regard to evolving our portfolio, we have focused on markets at all for solid long-term growth rates markets where expertise and solution set is valued and in markets that provide opportunities for further expansion. Regarding our operating model, we strive to make the businesses we own better through the steady application of a number of value creating tools and processes. We started with the establishment of our global sourcing organization several years ago, to investments in talent development and embedding a continuous improvement process across the organization to more recent investments in shared services. We have steadily been adding capabilities and have a clear and executable path to sustained business improvement. Our discipline strategy of positioning ourselves in strong markets and improving our businesses allows us to generate significant free cash flow. Some of this cash will be returned annually through increasing dividends while much of it will be in reinvested to further grow our businesses thus creating even stronger platforms. In short, we believe today we have world-class leading platforms and attractive markets and are well positioned to deliver growth, margin expansion, and consistent free cash flow yield. With that I'd like to turn it over to Brad.

Thanks Bob, good morning everyone. As Bob mentioned we had a very strong second quarter. We achieved organic revenue and bookings growth at every segment. Leverage on this organic growth combined with solid contributions from our recent acquisitions and strong execution on margin improvement activities resulted in an overall segment margin of 15%. Sequentially, this represents a 320 basis point improvement over the adjusted first quarter. There were several highlights in the quarter, including broad-based growth in engineered systems, the return of organic growth in fluids, and meaningful progress in the retail fueling integration, productivity and commercial improvements in refrigeration and food equipment, and lastly strong growth in energy on a higher than expected US rig count and increased well completions. Also from a geographic perspective, US, Europe and China markets all grew organically year over year. As noted earlier, we are increasing our full-year revenue and EPS guidance as a result of our strong second quarter and our positive outlook for the remainder of the year. I'll share those specifics with you in a little bit, but first let's go through some of the details on the quarter, starting on Slide 3 of the presentation deck. Today we reported second quarter revenue of 2 billion, an increase of 18%. Strong organic growth of 10% was complemented by acquisition growth of 12%. Partially offsetting these results was a 4% impact from dispositions and FX. EPS was a $1.04d, exceeding the high end of our expectations, principally reflecting strong conversion on higher revenue. Segment margin was 15%, 190 basis point improvement over last year, primarily driven by strong incremental margin on increased volume in our energy segment and by stronger performance in refrigeration and food equipment. Bookings increased 19% to 2 billion. This positive result reflecting organic growth in each segment is comprised of 12% organic growth and 11% acquisition growth, partially offset by a 4% impact of dispositions and FX. Book to bill finished at 1.01. Overall, our backlog increased 21% to 1.3 billion. On an organic basis, backlog increased 16%. Free cash flow was 150 million in the second quarter, a sequential increase of 115 million. We expect very strong free cash flow generation in the back half of the year consistent with our normal pattern. Now turning to Slide 4. Our strong organic growth was broad-based. Engineered systems grew 5% driven by solid activity across both platforms. Fluids organic revenue increased 4%, principally driven by solid retail fueling and strong industrial pump in pharma and hygienic markets. Refrigeration of food equipment increased 5% reflecting alignment with retail refrigeration customers who are investing. Lastly, energy grew 39% organically. As seen on the chart, acquisition growth was 34% in fluids and 10% in engineered systems. Turning to Slide 5. Engineers systems revenue of 655 million, was up 5% organically reflecting broad-based growth. Earnings increased 3% as volume leverage was moderated by investments and material cost inflation. Our printing and identification platform revenue increased 5% organically, driven by continued strength in our marking and coding markets. In the industrial platform, revenue increased 15% including acquisition growth of 17% and 5% organic growth. The organic growth was broad based with particular strength in our waste handling business. Margin was in line with our expectations, which included a 90 basis point impact from acquisitions. Bookings increased 14% overall, including organic bookings growth of 9%. Organic growth reflects solid markets across the segment. Book to bill for print and identification was 1.01, industrials was 0.97. Overall book to bill was 0.99. Now moving on to Slide 6. Fluids revenue increased 36% to 553 million reflecting our acquisitions and retail fueling and 4% organic growth. Organic revenue growth was primarily driven by solid activity in retail fueling, especially in Europe and Asia and strong industrial pump in pharma and hygienic markets. Earnings increased 36%, largely driven by volume growth, including acquisitions and productivity gains. Of note, we have accelerated the pace of our retail fueling integration and now expect a 6 million net benefit for the year, up 3 million from our prior forecast. This will put us ahead of the pace for 2018 synergy benefits. Margin in the quarter was 13.3%, up 330 basis points sequentially representing meaningful progress in our retail fueling activities, including integration and commercial actions. Bookings grew 34%, driven by acquisitions in organic growth of 4%. Organic bookings growth was driven by solid activity in our pumps and our hygienic and pharma markets. Book to bill was 1.0. Now Turning to Slide 7. Refrigeration and food equipments revenue of 426 million included organic growth of 5%. The organic increase was largely driven by strong activity in our retail refrigeration business. We outperformed the border market on the strength of our alignment with customers who are investing in energy efficient solutions and enhanced fresh and prepared food merchandising. Food equipment results were in line with our expectations, with solid results in our can-shaping business more than offset softness in our commercial cooking equipment markets. Earnings increased 4% from the prior year or 8% on an adjusted basis, excluding the impact from a prior-year disposition. Margin expanded 70 basis points year-over-year and 600 basis points sequentially, reflecting improved execution and volume leverage offset in part by previously mentioned material cost inflation. Bookings increased 6% organically. Book to bill was solid at 1.09. Now on Slide 8. Energy revenue of 359 million increased 39% year-over-year and 11% sequentially. Earnings were 53 million and segment margin was 14.9%, both significantly improved over last year. These results exceeded our prior forecasts largely driven by US rig count growth, increased well completion activity and strong results in bearings and compression. Bookings were up 43% year-over-year and 1% sequentially, setting us up for a solid third quarter. With respect to the third quarter, we expect revenue will be up about 1% to 2% sequentially. Book to bill finished at 0.98. Now going to the overview on Slide 9. Our second quarter corporate and interest expense were both essentially in line with expectations. Our second quarter tax rate was slightly higher than forecast at 28.9% and included 2.5 million of discrete tax costs. Excluding these costs, our effective tax rate was 27.8%. Now moving on to Slide 10. We now expect total revenue to increase 12% to 14% versus our prior forecast of 11% to 13%. This forecast includes organic revenue growth of 5% to 7%, up 1 point. The impact from completed acquisitions, dispositions and FX is essentially unchanged. From a segment perspective, organic growth of engineered systems and fluid are both being raised 1 point, driven by solid second quarter and broad-based bookings growth. Refrigeration and food equipment remains unchanged from our prior forecast. Energy is now expected to grow 24% to 27% organically, up 4 points over the last forecast, largely driven by strong second quarter growth and continuing constructive markets. Our full-year forecast for corporate expense is up 5 million, primarily on increased investments. We expect third and fourth quarter tax rate to be about 28%. Further our forecast for CapEx and free cash flow is unchanged. Lastly, we now expect full-year adjusted segment margin to be up slightly from our prior forecast. As a result, we now expect full-year EPS to be in the range of $4.23 and $4.33, up $0.15 from our prior forecast at the midpoint or an increase of 38% over 2016 on an adjusted basis. The revised guidance reflects increased second half performance and in all segments. Please note that our guidance bridge can be found in the appendix of our presentation deck. With that I'll turn the call back over to Bob for some final comments.

Thanks Brad. I am very excited with our strong first half performance. All segments positively participated in our results through acquisitions, improving end markets or internal initiatives. Each segment had multiple drivers of performance improvement. Now let me take a minute to share my views on some of the important drivers that should positively impact our midterm performance. In engineered systems, our printing and identification platform will continue to deliver consist solid performance, driven by our focus on consumables and product innovation and marketing and coding and our unique position in the digital textile printing market. In our industrial platform, we have built leading positions in vehicle service and waste handling. Our focus in these markets is around providing full solutions rather than simply equipment. Within fluids, we expect to the EMV [ph] upgrade cycle in the US to accelerate starting in the second half of 2018. Along with that, our growing participation into hygienic and pharma, and industrial pump markets should provide for solid mid-digit growth in the segment. This growth will be complemented by margin expansion from our retail fueling integration and from the application of our operating model across the segment. In refrigeration and food equipment, the strengthen in our retail refrigeration business reflects our leading position in cases and systems, our technology around energy efficiency as well as our expertise helping our customers effectively merchandise fresh and prepared food. The retail food market continues to evolve and is shifting to these areas where we are the acknowledged leader. Finally, within energy, the significant drilling activity we've seen over the last few quarters has created a large backlog of drilled but uncompleted wells. We expect that many of these wells will get completed over the coming quarters and we will have strong participation in this activity. In all, our markets remain solid and I expect our execution to remain strong. With that I'd like to thank our entire Dover team for remaining focused on our customers. Now Paul let’s take some questions.

Thanks Bob. Before we take the first question, I'd just like to remind the listeners if you can limit yourself to one question with a follow-up we’d be able to get more questions. And so with that Stephanie, can we have the first question.

[Operator Instructions] Our first question comes from the line of Jeffrey Sprague with Vertical Research.

Bob, could you pick up on the last point on drill but uncompleted wells and provide a little bit more color on what you're seeing there. Just eyeballing your book to bill and a little bit of backlog draw, some of which is not unusual seasonal, but it does kind of raise the question if this wave of drilling is going to be fully followed by kind of the wave of completions, which would seem to be necessary to carry your results into the back half. So any color there on the visibility that you have in that business and maybe the state of play on the number of wells and backlog et cetera could be helpful.

Maybe I don't do it in the exact order you've asked the questions, Jeff. So let me start with the last question on the status of drilled but uncompleted wells. I don't have the data here in front of me, I did look at it a few days ago and I think the status of drilled and uncompleted wells at the end of the second quarter was a bit higher than it was at the end of the first quarter. Even though well completion activity did increase during the second quarter. The drilling activity has been rather robust during the second quarter. Our outlook for the second half of the year, Brad, you're going to help me here with a number. But I think for the second half of the year in drilling, our forecast assumes that rig count will be up. I think it's rather modest 1% or 2% from where it is right today, Jeff. We're not forecasting much growth and further rig count deployment. We do continue to see the completion of wells continuing in the second half of the year. The activity in the Permian remains quite strong and in fact I think sequentially, June was up 15% over May, I don't remember what the data was, May over April, but I do know that June was up 15% over May in the Permian. And we feel fairly solid with our forecast for the second half of the year depending upon rig count, it could be conservative.

And just shifting gears to another topic. Refrigeration is up 5% organic in the first half. What gets us to up only 1 to 3 for the year, what's really happening in the back half?

I would start first by telling you that our first quarter was probably a bit stronger than we anticipated. Our second quarter was a bit stronger than we anticipated. Our bookings were strong during the quarter. June bookings were solid. I think we feel fairly comfortable and confident with our third quarter forecast. And I will tell you that sitting here today, I feel like we're being a bit conservative with our fourth quarter forecast. This was the only segment where we did not raise organic growth for the balance of the year. And Jeff, my color comment on that was the activity within this segment wanted to see a raise in organic growth in refrigeration and I would just tell you, I think we're being a bit conservative with our outlook for the fourth quarter and did not raise organic growth. But the activity sort of, today sort of warrants that, but I think we're being conservative.

Can we have the next question please?

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

Just a question on, EMV and Wayne, it looks like its steady sequentially, but how should we model revenues in the second half of ’17 and where are the orders trending for US fuel. How should we think about I guess the regulatory cycle.

Well we shared - we shared the outlook over the next two to three years at our Investor Meeting in June. We do expect EMV in the activity in the second half of the year to moderate and to be less than we expected as we open the year. That said that's primarily a US comment. I would compliment that US comment by saying that for both Wayne and Tokheim, most notably at Tokheim, our revenue activity, our market activity in Europe, Middle East, Asia has been stronger than we anticipated both in the first quarter as well as a second quarter. And even though we see a little bit of moderation of activity in the US here in the second half, I would be remiss by not sharing the fact that our earnings for the year are remaining as we have held since we opened the year, we have strong earnings potential.

And that's a question on cash flow. As I look at the first half cash flow and it makes perfect sense given where the organic growth is for the business so far year-to-date, but 140 million versus 170 million last year, but you are calling for a very strong cash conversion, 140% for the year. If organic growth continue, how do you get working capital out of the company with strong organic growth.

So let me take that question. You do point out quite correctly that in the quarter we had very strong organic and total growth as well at 18%. So, working capital did increase, net about 50 million in the quarter with AR being about 100 million up. So, given the sequence within the quarter, with June being the largest part of the quarter's results, gives me some confidence that as we go into the back half that receivables will be collected. Now let me comment on inventory because I think this is an important point. We did see our inventory; we said this in the first quarter. We continued to carry into the second quarter with inventory increase of about 50 million more than we would have expected principally driven by a few areas, one being as we referred to before to better manage our peak periods of production flow in refrigeration, we increased some inventory there. That will burn off in the second half. We also selectively increased inventory as we started to see some material cost inflation in very specific areas, not broad based, but very specific areas. So all in all about 50 million of inventory builds over above where we would have expected that I have full confidence will burn off in the second half.

Brad, the only other comment I will make there is on working capital as a percentage of our revenue. I actually think we're at the lowest working capital number as a percentage of revenue since I've been CEO.

Well, longer than that.

Longer than that, yeah. So it was a record low of 17.6% in the quarter, which shows really the guys are doing a great job on looking at and managing our working capital in total.

Andrew, we feel quite comfortable with our cash flow forecast for the balance of the year.

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

So I just want to pick up on Andrew’s points on Wayne. Is the second half pretty much tracking to you know how you saw with maybe two months ago. I think you mentioned perhaps that the first half was a litter bit stronger second half but weaker than back in June. I just wonder if that dynamic has changed at all.

I think the comments – well, you say two months ago, let me refer to my comments that we shared with all of you at our June Investor Conference. And I think the second half is shaping up fairly close to what we - to the color we shared at the June investor conference. EMV activity is down in the second half relative to what we expected coming into the year. And again that's a US comment, but I will tell you it's - we are very, very pleased with the activity of both Wayne and Tokheim outside of the US. And we actually feel, we actually feel quite good with the commercial activity and the integration activity within this platform.

And then switching back to energy Bob, this mix between drilling and production, so I’m just wondering, as these ducts start to complete, that 1% to 2% higher revenue in 3Q, is the mix between drilling and production materially different to what we’ve seen in the first half of the year, 2Q and do you think you can actually grow margins sequentially on the back of them?

Yeah. We’ll see a bit of a tapering in the growth in our drilling activity. Actually, I would maybe rephrase it. I think we will see more than a bit of tapering in the growth of our drilling activity. But offsetting that, we do expect growth in well completion activity that will be recognized by our artificial lift in our automation businesses.

But specific to margin, off of the second quarter rate, we do expect to expand that margin in the back half on energy.

Sequentially?

Yes.

Your next question comes from the line of Charley Brady with SunTrust Robinson Humphrey.

Just wondered if you could comment on the Amazon Whole Foods merger as it relates to the refrigeration food equipment business and kind of some of the consolidation that's going on, taking place in there, and maybe how it affects your view of that business long term.

Okay. Well, there's two parts. So the consolidation within the industry, goodness, we've been seeing that occur for several years now and of course, when it does, when company A and company B go together, it's not uncommon for us to see a bit of a pause, while the combined business decides what they’re going to do with respect to remodel or new store construction. But that's sort of normal for this industry. The first part of your question, with respect to Amazon and Whole Foods, my answer is not going to surprise you. We're not seeing any change right now and there really hasn't been any communication that we've received from either of the two that would lead us to believe that it's going to have any impact on our business.

Great. Thanks. And just as a quick follow-up, just I want to clarify the comment on the Tokheim business in Europe, so you're saying that that European business is the strength there to fully offset the softening you're seeing in EMV in the second half?

Yes. In fact, let me clarify that. It's not just Tokheim. It’s Tokheim and Wayne, seeing better activity in Europe, the Middle East and Asia that is truly offsetting a little bit of the softness we're seeing in the second half with respect to EMV activity.

Your next question comes from Andrew Kaplowitz with Citi.

Bob, so clearly the chassis issues that you had in waste handling seem to be behind you. So how do we think about your overall industrial business within energy and engineered solutions going forward? Can you sustain mid-single digit organic growth and then you mentioned last quarter that waste handling could be up high single digits for the year. Do you see that kind of growth potential for that business?

Well, I'm going to give you both a comment for the year and then echo what we shared with everyone at our June investor conference. The growth we've seen in the first half, especially in the second quarter, we see it continuing in the second half. In fact, relative to our guidance, it's going to edge up a bit. Our waste handling, our [indiscernible] management business is performing well. The chassis issue is behind us. That business built revenue during the quarter with, I would say, June being, I think, it was a record shipping month in June for that business. And the outlook for the second half of the year for that business is as solid as we've been signaling all year long. It is high single digit growth in that business for the year. The other comment I would share is beyond 2017 and this is what we shared at the Investor Conference a few weeks ago, we see the industrial platform is having strong mid digit growth -- organic growth for the next two to three years and we think we're in a very good market position. We think we're in a very good technology position and it's not just waste handling, it's across the platform.

Bob, that’s helpful. And then, can you talk about your appetite for bigger portfolio management, specifically how that -- how you're thinking about energy now. When you look at rig counts, they have shot up faster than really anyone expected. There’s been some oil price volatility here, which leads to some fear that rig counts are peaking. Does that incentivize you at all to potentially try and monetize energy faster, how are you thinking about it right now?

Look, I think that's at least the third question that I've had this year on energy and our portfolio inclusion. And my answer, I’m smiling when I say this. And my answer is really the same. This is -- we've built a great position with these businesses around our upstream energy portfolio. We did expect strong growth in these businesses this year. We've seen it. We'll see how the second quarter or the second half performs. I happen to think we may be slightly conservative on that second half guide. And it is that and other topics that are similar to this is something that Brad and I do review with our board on a very periodic basis. I have no other new news to share with you.

Your next question comes from the line of Steve Tusa with J.P. Morgan.

Good execution in the quarter. Definitely, all these issues of the last year or so or a year and a half ago are pretty much, look like they're remedied. So congrats on the execution.

Thank you. I appreciate that and the teams have done a good job.

Yeah. So on the energy business, so it looks like organic is up about mid-20s in the second half on the top line. Rig count year-over-year is up pretty dramatic, up I think like 70%, 80%, given the easy comps year-over-year, assuming a stable, assuming so. So is there any way to kind of give us the variability around, what if rigs were actually down, what would your revenue kind of -- what is the revenue profile of like how much that completion activity comes on to offset. So I'm thinking more kind of on a 12-month basis, if rigs were down year-over-year, is there enough duct activity out there, what -- I guess the question is, at what rate of rig decline and kind of over a 12 to 18 month period, would you still be able to grow the business, given the significant completion activity that's out there. How are you kind of thinking about that as you plan for the next year?

Steve, I don't have enough time remaining on this call to give you a complete answer to that. So let me, okay, I really want to do this.

Yeah. I guess let me simplify. Let me simplify this, is given the complexion of what you expect on completions and all these may get an ’18 question, I mean I know you guys don’t want to give guidance, but if rigs were down 10% year-over-year in ’18, 10%, what do you think your kind of -- can you backfill that with completion activity and still grow the business?

If rigs were down 10%, the well completion activity could very easily offset the decline we would see in our drilling activity. And we -- as -- we have done that analysis and if the price of oil remain constructive in the $45 to $50 area, we actually think we could have modest increase in revenue for the segment.

Okay. That's a great answer. And also just the mix of margins would obviously be a little bit different, right, because drilling is –

Somewhat, but not dramatically.

Okay. That’s a really great answer. And then lastly, just on energy, what do you -- did you change at all your margin expectations. What's the margin you expect for the full year?

Oh gosh. I don't have that data with me. I don't think from the margin expectations from our April call, the answer is no. In fact, they may have edged up 20 or 30 bps, 40bps from the April call expectation.

No. I think they're up a little bit more than that. I think our expectations now are up about somewhere around 80 bps.

80 bps.

Okay. And that’s 80 bps from where you were, from where you had originally guided?

That’s right.

Okay. One last quick question, on refrigeration and food, you got like 2.5% price, 2.4% price. Where did that come from? What drove that?

So some of it is material surcharges, offsetting the material inflation we've seen in the first half of the year. And in fact, I think in the second half of the year, the price increases -- and the price increases are done by the way. They were done at the end of the first quarter and coming into the second quarter. I actually think the price increases we've seen in that segment negate the material inflation that you would -- that we would receive as an input cost in the second half of the year.

Is that a new mechanism for you guys?

Some of it is also strategic pricing, Steve, but we have been very aggressive on material surcharge pricing.

Is that a new mechanism that you guys have put in place, because I recall this business was a little bit more pinched historically? So that's kind of something you guys have done as a reaction to kind of the last ten years of kind of history or whatever it is, where you know you're just kind of operating smarter?

I'm not sure it's 10 years, but I would say the last five or six for sure. Yes. And it is new.

[Operator Instructions] Your next question is from Mircea Dobre with Baird.

Just wanted to ask a question on optics rather than content, so for several years no, energy was typically the first segment discussed in your slides, it was the first segment discussed in Q. Now we've seen the second move at the end and obviously performance here is quite good. So I'm just wondering as to why this change has been made, what should we interpret that as and why now?

Well, I guess the biggest reason for that -- my answer is I was a bit bored. So for four years now, the order of the presentation has been alphabetical. I just decided to change it. Actually, we started to change it with our June investor conference and we just moved it from large to small. It's just as simple.

Okay. All right. So I shouldn’t read anything else in it?

I'm just bored.

Okay. And then my follow-up, maybe talking a little bit about engineered, sort of a guidance question for the second half. Performance here has been good, north of 3% organic for revenue in the front half. The bookings have grown organically double digits and yet your revenue guidance is only 3% to 4% organically for the year and the comps really aren’t getting tougher. So I'm wondering if it's the same level of conservatism as to what you apply in our revenue or if there's something else I should be thinking about.

Look, I have pointed out, I guess with two segments, both refrigeration and energy that our guide for the second half could be conservative. I'd like to think on that way for the entire group of segments for Dover. Don't read anything into, don't read anything into disparities here at Engineered Systems for the second half. We've got a fairly strong third quarter planned. I think across the board, we've taken a bit of a conservative attitude towards the fourth quarter and we just have a lot of delight with what's going on in engineered systems.

Your next question comes from the line of John Inch with Deutsche Bank.

I guess I have a question about the font you used in your presentation.

I'm not going to answer that one.

Don't imply anything by the size of the font.

That was a cheap shot, but I couldn't resist. Okay. The performance, including restructuring this year, the $1.36 to $1.40, Brad, can you remind us how much of that you say it's including restructuring benefits, how much of the restructuring benefits again in 2017 and are there a spillover that you could quantify that go into ’18?

Oh gosh. Okay. But restructuring benefits, I think last time we said within that line item, the restructuring benefits would be about 46 million, which included carryover from the prior year 2016. Now given the acceleration that we're talking about with respect to the integration with DFS and other activities, we're now at about 52 million, so up 6 million of restructuring benefits. At this point, I really don't have a good number of the carry over into ’18, but certainly we're going to continue to see the continuing impact of the integration activity where we said 35 plus million I think, we were thinking. It wants to go higher and we’re not seeing a lot of that right now in 2017, because of the costs. The delta between the benefits and the cost being about 6 million, that continues to grow into those out years, so that you can count on.

Yeah. That makes sense. Bob, what were your comments around EMV in ’18, I missed it. You were talking about EMV picking up significantly in ’18. What’s the framework in context of that again please?

To be specific, we shared this at our June investor conference that we do expect some slowdown and softness and EMV roll-out here in the US in the second half of ’17 and in the first half of ’18. But we do expect that EMV activity to start to pick up in a measurable way in the second half of ’18.

So that makes sense. So that's just basically the anniversarying of the soft patch because of the push out in spite of the deadlines, are customers kind of giving you that feedback? I mean, obviously your primary competitor is sort of saying the big oil companies are still spending and what, I'm just trying to understand how kind of hard and fast some of these estimates sort of are, so –

Yeah. I would agree with that. Our larger customers, the oil companies and some of the larger chains have continued with their EMV upgrades, especially in the first half, but those commitments were made by the customers in the October-November-December timeframe of last year and they have continued with their EMV upgrades and we still see continuing EMV upgrades in the second half. It hasn't fallen to zero. It's just not as strong as we would have expected eight months ago. But the input we're getting from customers is, they can defer it a year and many of them are deciding to do that.

That makes sense. If we go back to earlier in the year, you were cautioning against getting too crazy in terms of us forecasting too high a variable contribution margins for energy and I think one of the commentaries was, look, we might have to put back or layer in some cost. So I guess I'm wondering is that still sort of valid, I mean, you did really great variable contribution margins this quarter and the context I'm sort of trying to understand is, as the rig counts kind of swap the baton with well completion, is there something about the mix of those activities or sort of absorbing fixed costs that naturally would cause for variable contribution kind of rates if you will to ebb against this notion of, I do actually have to hire people back because the business is just really good.

No. I understand your question. So I would tell you that we did especially in our drilling inserts business, we did see cost added in the first quarter. We saw some additional cost added in the second quarter, and in the second quarter, we did make a conscious decision that we wanted to bring our lead times and our delivery cycles back in. We divide and stretch a little bit, but we’re willing to bring them back in. Within artificial lift, the bulk of the cost adds here in the first half of the year, I don't want to say all of it, but it has been primarily related and restricted to cost adds around our ESP business. In the second half of the year, as we expect well completion activity to pick up a bit, we will have to add some cost in other parts of artificial lift.

And just last, our energy, so all this opining about divesting energy, what about the prospect of doing an energy deal or two maybe in -- maybe in the submersible pump business or something like that, is that off the table and if so why would it be?

Well, that question has been asked before and I -- my response -- my response over the last six or nine months has been, look, what we have today and especially in artificial lift and automation, it reflects the strategy that we laid out in ’09 and ’10 to build this upstream business and we were really focused around artificial lift. And if you look at where our spending on acquisitions has been over the last six years, Brad, over the last six years, within this segment, gosh, I think 90% of it has been in artificial lift. We actually feel we're pretty much done with larger deals in the upstream business. There is always a smaller opportunity or two that we look at. We're looking at one or two right now that would help us expand our capability, especially around technology or geo in artificial lift. But you shouldn't -- you shouldn't expect us to be spending any significant M&A dollars in our upstream energy business next quarter, the following quarter or next year.

Yeah. Just wasn’t sure if the thought had maybe changed, considering the industry has rebounded to the degree it has.

No. I think if you're going to see anything of any, I call it, reportable size within upstream, you'd see us execute on something around automation.

Your next question comes from the line of Deane Dray with RBC.

Yes. Back to energy and I may have missed this, but can you comment on the contribution from price across the business by drilling and production and bearings and automation.

Okay. My comment, my lead comment on price for energy for the second quarter is that it was neutral. Maybe, it was what, a positive 0.5% or something, which is called neutral. We actually do expect a little bit of a price increase activity in the second half, Deane. I would label it as very specific, very modest and most of what we're looking at right now is to offset the increased costs we're seeing on some steel input.

And then when I look at the book to bill just under 1 and I'm trying to reconcile that with the comments and the nice things you're saying about bearings and compression growth in the quarter. Since that's a bit longer cycle, I would have thought you would have seen that come through in higher bookings and I know on an absolute basis, bookings were up big, but why wouldn't that have been reflected in a higher book to bill?

I just wouldn’t read anything to it. I think it's just all a matter of timing. We had an outstanding quarter at bearings and compression in the second quarter. The revenue and earnings were a bit higher than we had anticipated, coming into the quarter. And it's -- that business is pretty much a book and ship business. It just doesn't carry a lot of backlog.

Your next question is from Nathan Jones with Stifel.

If we could start with some of these investments, you called out engineering and corporate investments, are there an increased level of investments going on in other segments? Is this, maybe you’re catching up on some stuff that you'd scaled back in the last couple of years when demand wasn't great and how you're thinking about making some of these, what I assume are more voluntary investments going forward?

No. At the segment level, I think the only significant investment that we've called out and we did that early in the year, I think on the, at our January meeting and our January call was within engineered systems and we did make a very conscious decision late last year as we come into 2017 to increase some investment spending, we call it investment spending, it's the P&L around the build out of our digital textile business and a little bit more, little bit of an increase in product development spending and innovation spending within our marketing and coating business. But if you look at the other three segments, yes, I mean we've increased spending, but it was not along the lines of warranting a call out, like we did at engineered systems. With respect to -- your other comment was with respect to what corporate and it is up a bit this year. We have increased our spending around IT security. We've increased some spending around IT infrastructure. And we're carrying a little bit more of expense at corporate right now with respect to helping us manage our digital rollout.

Okay. And then just in the fluids business, you’ve obviously seen a big pickup in the short cycle energy business, some of your long cycle energy business that’s hitting fluids, have you seen any change in trends in that business there.

So within, this is specific to pumps, correct?

Yes.

All right. Within the pumps, I would say the only thing that we've noticed in pumps with respect to our longer cycle oil and gas exposure is that we have seen throughout the year, it was more noticeable in the second quarter than it was in the first. We have seen an increase in pump activity, especially in the Permian. But that's not what was driving the 4% organic growth in the second quarter and I’m sitting here today, I will tell you that's not what's driving our increased outlook for fluids in the second half of the year. It really is an increased activity in, what I would call, industrial applications and continuing increased activity in the hygienic and pharma.

At this time, we have time for one additional question. Your next question is from Scott Graham with BMO Capital Markets.

I have one question and seven follow-ups. My primary question is about the fueling and transport business. And, I know the part of the idea behind acquiring Wayne was to build your critical mass, not just in EMV, but really also away from the EMV, that portion of the business and what gets this business growing, when does that critical mass start to be brought upon the market to accelerate the growth away from EMV?

Oh, I think we're seeing it this year. As we have, I think shared at least once last year and a couple of times this year, we see the -- we see that retail -- we see that retail fueling market as a sort of -- as a baseline globally, growing something like 3% a year. And then, you have some, I call it, special cycles that you add to it, EMV being one of them. And we’ll experience that in 2017. Don't lose sight of the fact, don't lose sight of the fact that within fueling and transport, which includes OPW that there's a business within OPW that provides components and hardware for the railroads. And that rail business is actually down about 20% this year. And we have been talking about that and signaling that for the past, I don't know Brad, four or five quarters, but it will continue to be down this year and it is a headwind for that fueling and transport business. The other parts of fueling and transport I think are doing quite well.

My follow up is simple, the pumps business. We saw some nice organic growth in that business. Did you see anything in any specific end market that was the driver there? I know the comparison was easy, but still up 6 is up 6 and just kind of wondering what was the driver there.

Well, I’ve sort of commented on that from an application point of view, it was General Industrial. It was hygienic and pharma and the only other color I would add to that, it was very broad based from a geographic expansion. We saw growth here in US, North America, Europe and China and Asia. It was quite broad based.

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

Thanks, Stephanie. I just wanted to thank everybody for joining us today on the conference call. We thank you for your interest in Dover and we look forward to speaking to you again next quarter. Have a good day and a good weekend. Thanks. Bye.

Thank you. That concludes today’s second quarter 2017 Dover earnings conference call. You may now disconnect your lines at this time and have a wonderful day.