Good morning and welcome to Dover’s Second Quarter 2020 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer; Brad Cerepak, Senior Vice President and Chief Financial Officer; and Andrey Galiuk, Vice President of Corporate Development and Investor Relations. [Operator Instructions] As a reminder, 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. Andrey Galiuk. Please go ahead, sir.

Thank you, Laurie. Good morning, everyone and thank you for joining our call. This call will be available for playback through August 12 and the audio portion of this call will be archived on our website for 3 months. Dover provides non-GAAP information and reconciliations between GAAP and adjusted measures are included in our investor supplement, presentation materials, which are available on our website. We want to remind everyone that our comments today may contain forward-looking statements that are subject uncertainties and risks, including the impact of COVID-19 on the global economy and our customers suppliers, employees, operations, business, liquidity and cash flow. We caution everyone to be guided in their analysis of Dover by referring to our Form 10-K and Form 10-Q for the second quarter for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. With that, I will turn this call over to Rich.

Thanks, Andrey. Good morning, everyone. Let’s begin with the summary of the results on Page 3. We expect that Q2 to be challenging and in preparation we reinforced our cost-out program earlier in Q1. So we were in some sense prepared for the battle. We entered the quarter with a comprehensive set of actions to manage through the turbulent times and focused on what we can control our operations, costs and importantly, safety of our employees. From an operational point of view, we are not out of the woods yet, but a significant majority of our facilities are up and running moving into Q3, which is positive to operating leverage as compared to this quarter. Top line trends are very much in line with our expectations entering the quarter. Revenue declined 16% organically and bookings declined 21%. Trends have improved in the quarter and we saw material sequential improvement in June. We still carry a strong backlog across all segments and that increases our confidence for the second half. Margin performance for the quarter was acceptable considering the state of business activity in April and May. After profitability gains in Q1 on lower revenue, we targeted 25% to 30% decremental margin for the full year. Thanks to the broad-based cost control efforts to offset under-absorption of fixed costs and steady execution of $50 million of in-flight initiatives, we achieved 27% decremental margin in Q2, a quarter which we expect to be the trial for the year. That puts us on track to exceed our initial full year target. In addition to the tight cost controls and variable costs, we took further structural cost actions in the quarter as part of our business realignment activities, which will benefit us in the second half. Along with our cost actions, our proactive working…

Thanks, Rich. Good morning, everyone. Let’s go to Slide 5. On the top is the revenue bridge. As Rich mentioned in his opening remarks, the top line was adversely impacted by COVID-19, with each segment posting year-over-year organic revenue declines. FX continued to be a meaningful headwind in Q2, reducing top line by 1% or $24 million. We expect FX to be less of a headwind in the second half of the year. Acquisitions were effectively offset by dispositions in the quarter. The revenue breakdown by geography reflects relatively more resilient trends in North America and Asia versus the more significant impacts across Europe and several emerging economies like India, Brazil and Mexico. The U.S., our largest market declined 10% organically with four segments posting organic declines partially offset by growth in retail fueling. All of Asia declined 14%. China, representing approximately half of our business in Asia, showed early signs of stabilization posting an 11% year-over-year decline in the second quarter, an improvement compared to a 36% decline in Q1. Imaging & Identification and Engineered Products were up in China, while Fueling Solutions declined due to the expiration of the underground equipment replacement mandate and also slower demand from the local national oil companies. Europe was down 19% on organic declines in all five segments. Moving to the bottom of the page, bookings were down 21% organically on declines across all five segments, but there are reasons for cautious optimism as we enter the second half. First, as presented in the box on the bottom, June bookings saw a significant improvement from the May trough, with all five segments posting double-digit month-over-month sequential growth. Second, our backlog is up 8% compared to this time last year driven by our longer cycle businesses and the previously mentioned intra-quarter improvement in…

Okay. Thanks Brad. I am on Page 9, which is an updated view of the demand outlook by business we introduced last quarter. Here we are trying to provide you with directional estimates of how we expect segments to perform in the second half relative to the second quarter in lieu of full year revenue guidance. I will caveat that all of this is based on current reads of the markets and is subject to change as the situation remains fluid. First in Engineered Products, shorter cycle businesses such as vehicle service and industrial automation have shown improvement late in the quarter and the trends are improving globally. Additionally, aerospace and defense continues operating from a large backlog of defense program orders. Waste handling may see some headwinds driven by tightening of industry CapEx and municipal finances after several years of strong growth performance. Bookings have slowed in late in Q2 as customers paused their capital spending to manage liquidity. We were watching the dynamics closely, but we have started addressing the cost base in this business proactively. Fueling Solutions is a tale of two cities, North America, approximately half the business remained resilient both on EMV conversion and also willingness of non-integrated retailers to continue investing in their asset base. In Europe and Asia, integrated oil companies represent a larger share of the network and capital budget cuts resulting from oil price declines are having a more negative impact on investment in the retail network, plus recall we are facing a $50 million revenue headwind in China this year from the expiration of the underground equipment replacement mandate. Despite some of the top line headwinds with robust margin accretion to-date, we expect segment to hold its comparable full year profit line despite a decreasing top line. Imaging & Identification…

[Operator Instructions] Our first question comes from the line of Andy Kaplowitz of Citigroup.

Good morning, guys. Rich nice quarter.

Thanks, Andy.

You mentioned material sequential improvement in June. Are there any of your shorter cycle businesses that have not improved as fast or faster than expected? And can you give us more color on, if you have seen any sort of slowdown in the rate of improvement in late June and July, particularly in the U.S.?

We would have not given out full year EPS guidance without seeing June. That is how I think that we have mentioned that when we ended Q1 that June was very important in terms of what we thought the trajectory was. And so, I mean, I think that we went through the bookings change of June and made a variety of different comments about the business about the moving parts of who is improving and who is not. I mean, I don’t want to go through all the companies again. We have got a few, like digital printing, like food service that have not improved and we don’t expect them to improve. So at the end of the day that’s not built into our guidance. But we called out a few of the shorter cycle businesses like aftermarket automotive for example, which has picked up significantly at the end of the quarter. So June was good. I think that we are pleased. It was material to the quarter earnings June. The profit the absolute profit in June was double what we made in April, just to put it in contextually. So I think if you go back and you look based on the I think whatever slide it is in here, the Slide 9, that gives you the color all the color I can give you in terms of the trajectory of the portfolio and the moving parts.

Great. And then your commentary on Refrigeration & Food equipment was relatively optimistic. May be talking about the second half of the year, but as you said backlogs continue to improve. Have your customers given you more of an indication that they are right to let you into their stores yet. And then we know your automation project was a start-up in July. So maybe just update us on that? And can give us a little more color on sort of the margin trajectory in the second half of the year?

Sure. Let’s start with Refrigeration. We are booked into Q4. So it’s up to us now to produce the product without have any frictional costs and based on the margin that the business delivered in June, if we can get that for the full quarter, I think, which is our expectation, I think we will be pleased. In addition to that, part of the large backlog that we have in this segment is geared toward Belvac. So we are on the front foot in terms of capacity expansion in aluminum can making and we are participating in that and we have got some relatively large projects that will begin building at higher rates in the second half. And in all honestly, I mean, if we put foodservice equipment aside for a moment, we don’t have the hardest comp in the second half. It’s not as if we exited 2019 firing on all cylinders. So we will – that’s why we will do better H2-to-H2 on a comparable basis, but it’s largely as a result of heat exchangers continuing to improve modestly over the second half, Belvac shipments and material improvement in Refrigeration cases.

And then the automation project itself?

That’s baked into the margin improvement that we expect in the second half.

Okay. Thanks Rich.

Thanks.

Your next question comes from the line of Scott Davis of Melius Research.

Hey, good morning guys.

Hey, Scott.

Good morning, Scott.

Rich or Brad, can you give us just a sense of this shape or recovery in China. It’s – this quarter, I think you said it was down 11%. Does 3Q then become, I mean, if you had to guess, is it more flattish or is it still down and with the chance of being up in 4Q?

Look, all of the relative decline or substantially all of the relative decline in the quarter is because of this double wall tank issue, which we had guided at the beginning of the year. I think that if we remove that, we were – I believe we were flat to slightly up on the balance of the businesses. So that’s going to be a headwind for us in the second half. Scott, I have not done the calculations of what that means quarter-by-quarter, but we always had that $50 million headwinds that we were going to have to deal with. It’s a bit slow on top of that in Fueling Solutions, just because the national oil companies in China are not spending any money right now. But if I – if we eliminate Fueling Solutions, the balance of our business which is mostly Printing & ID, have improved materially in Q2 and you expect that to continue for the balance of the year, and that’s volume related, right. So as China has restarted and business activity started, you can think about marking and coding into the consumption of consumables and things like that.

Okay. That’s helpful. And then just a quick follow-up on CapEx, I mean you are running at lower than usual levels I guess – lower than the expected levels. Do you anticipate that having to go up meaningfully kind of 2021 or do you think, I mean, you can imagine need a lot of capacity, but two facilities that need to be invested in etcetera is there – or is there going to potentially continue through 2021?

Over, I would say the last where are we now in July, over the last 8 to 10 months, we have had approximately $80 million of spending that were attributed to two projects. One was the automation project for Refrigeration cases and one was the brand new building that we built for Colder Products up in Minnesota. So those – I don’t – we don’t have anything in the pipeline of that quantum. So I would expect CapEx to slightly rise in 2021, but not materially as if we deferred CapEx in 2020, and we have got catch-up in 2021. Now having said that, what, if we have got the demand, and we get some projects in that we don’t have in the pipe, we are more than happy to invest organically in this business based on the returns we get.

Got it. Thanks. Good luck, guys. Thank you.

Thanks.

Thanks.

Your next question comes from the line of John Inch of Gordon Haskett.

Thank you. Good morning, everyone. Hey, Rich and Brad the $13.4 million of cost actions you took in the quarter, how much of that was – how much of that maps against the original $50 million target and how much was new incremental structural, because I think Rich, you had called out some new incremental structural in a couple of the business segments in your prepared remarks.

That is the new structural. So the $50 million...

So that’s all new structural.

Yes. The $50 million was done and dusted and it was on average $13 million a quarter. That’s what we got in this quarter and that’s what we can expect rolling through the other two. The charge that we took for restructuring in Q2 was new. It was a project that we are working on. We just pulled it forward. So it will have an impact in the second half of the year, but that is baked into our EPS guidance.

So the $50 million or the $13 million that’s kind of baked in the cake and based on your intentions Rich, when we exit 2020, how much more annualized structural do you think you will have gotten out annualized, so not necessarily all in 2020, by the time we exit 2020?

How about...

Incrementally just due to...

Yes, I know where you are going. But let’s – give us another quarter, because we have got some other actions in the pipeline. And when we get to the end of Q3, we can kind of give you some color of where we are tracking on the $50 million for 2021, but it’s a bit premature right now.

Okay. So just to be clear, this is stuff that you are doing that is targeted at sort of baking in the cake the 2021 $50 million or is this – do we have like a $50 million annually. And then we have this downturn and you go, we can do even more on top of that, or this is all part of that progression of the $50 million?

Yes. I think this is what we said at the end of Q1. While we are not just going to sit here and wait for the clouds to part, right? We are being on – we are taking some action on the front foot. These are projects that we had in the pipeline, and because the level of business activity that we had, we just said, why don’t we do it now. So that action was taken. So they are incremental to the 2020 $50 million. They will accrue some benefit in the second half of 2020, and then we will redo all of what we think that we have got in the pipe for 2021 likely at the end of Q3.

And then, just as a follow-up, what sort of temporary cost actions, is there a way Brad to quantify those like you could call it furloughs or T&E? And I’m curious then Rich, given the environment, right, like a lot of companies are now realizing, people can work from home. We don’t need as much travel. What is your thought process toward turning some of those temporary cost saves, if you could give us the magnitude and just say more permanent cost saves depending on how the economy unfolds?

Well, look at the end of the day, the temporary cost savings as a result of managing bonus accruals, we would expect and hopefully to build those back next year. So those come back. On the variable cost, mostly in SG&A, I think the jury is still out. I think that clearly we like everybody else have recognized that. What we need to conduct business may be different in 2021 when we looked back historically. So we get ready to do our plans on the operating company level for 2021, the conversations we are having are operating company president is, this is a notion of okay, well, I can go put my ‘19 SG&A back as long as the revenue supports it, but I think it’s a bit premature to kind of monetize that now. But clearly, we are thinking about it and I don’t expect that we will just snap back from an SG&A point of view, back to ‘19 levels.

That makes sense. And is there a way to quantify what sort of cost actions temporarily you took because of COVID in the quarter or sort of the run rate or whatever?

Look at the end of the day, we had a $35 million to $40 million fixed cost absorption headwind that we offset with temporary cost – with cost actions, right? That allowed us to have more or less flat gross margins quarter-to-quarter. Then we offset 30% of the lost revenue with SG&A cuts. Look at it that way.

Very helpful. Thank you very much. Appreciate it.

Yes.

Your next question comes from the line of Steve Tusa of JPMorgan.

Hey guys. Good morning.

Hey, Steve.

Just using kind of the – maybe this is like to sneak here something, but using the percentage of sales for free cash flow getting to something in kind of $6.4 billion range for annual sales. Is that kind of around the right level?

We are going to get to a revenue number by hook or crook here. This is the interesting way to go about it. Look, I think that that we have got line of sight on the percentage of revenue and on the conversion of net income. I expect – we have exited Q2 with arguably inventory that supports the short, what we can see it for Q3. So I would expect barring a real snap back in demand, outside of what we have got baked into our numbers that will be liquidating inventory between now and the end of the year.

Right. I guess on the revenue, though, like...

I know where you’re going. Look, I don’t think the number that you put out there is outlandish.

Okay. And when we think about kind of the third and the fourth quarter splits, I mean, in ‘18 – they usually are kind of around each other. I would think this year, maybe with the cost, the structural cost coming in and a bit of that Belvac backlog, perhaps in the fourth quarter. It sounds like things kind of took a step up in June. So maybe you are trending third quarter better. I mean how do we think about kind of the linearity for the third and the fourth quarter normally. Kind of seasonally, it looks like it’s roughly equal, but maybe this year it’s a little lower in third and higher in fourth. How do we think about the linearity there on the EPS?

You have got your finger on it. I mean, I think that we clearly we have a tough comp in Q4 in DFS. So that will be levered to Q3. The swing factor is going to be where we are on the long cycle side, which is driven by Belvac and Maag, and then to a certain extent, some other companies in there. I hope that we are bringing a lot of that into Q3. And if that’s the case then you would have a sequentially better Q3 and we are talking comp-to-comp here.

Yes.

Than Q4. So what’s known is barring a – and look I hope it happens, but barring a real uptick in demand on EMV in Q4. Right now, our expectation would be that we are down in DFS Q-to-Q. But I think right now based on June we are probably trending a little bit on a comp basis better Q3 and not – and less so in Q4 right now.

Right. And then just lastly, just to be clear on this CapEx thing. You guys actually I think raised the CapEx number from where you were last quarter. So it doesn’t look to me like there is, that’s the kind of the free cash flow comp for next year. It’s not like you are kind of squeezing tight there and that you have got a tougher comp on cash next year that this year’s cash obviously is inflated a bit by better working capital, but that we should think about some free cash flow growth next year, despite kind of the unusual situation of this year where things are being squeezed a bit.

That’s fair.

Okay, great. Thanks a lot guys.

Thanks.

Your next question comes from the line of Joe Ritchie of Goldman Sachs.

Thanks. Good morning guys.

Hey, Joe.

Hey. So, Rich, you guys did provide like a lot of great color on Slide 9 on what your expectation is kind of for the rest of the year. But I guess, from a magnitude standpoint, can you help provide maybe just a little bit more color on how June actually trended from a magnitude perspective and whether that’s just persisted into July?

Well, look, I mean, as I mentioned earlier, June was materially better than April, but April I hope that we don’t see again anytime soon. I mean April and May in certain of our businesses, which is a function, a lot of this issue about the declining backlog, I mean we were not shipping anything and we were not getting any orders either. So when we were looking at this decision about reinstituting guidance for the full year, I think that we have got a good playbook in control in terms of the operating cost side, but it was almost entirely contingent upon how June was, how June manifested itself, and June came in both on a bounce back in the order rates and in terms of absolute profit that portends well for Q3. So Brad’s got the joke, if we can just keep having June’s from here on out, we would probably be in good shape for the balance of the year. So that is about the color I can give you on it.

Okay. Fair enough. And I guess just as a follow-up to that, I thought you guys lifted your buyback suspension. I guess, how are you thinking about deploying capital at this point and whether you are going to be more aggressive now that you have lifted the suspension?

Well, I mean, I think the hierarchy remains the same of organic investment, inorganic investment and then capital return. I think that the CapEx number that we have given you for the full year is relatively safe now. So it is going to depend on inorganic investment. And if you go back to the comments, I think that the pipeline that we have right now is relatively encouraging and I expect to be deploying inorganic capital in the second half. But having said that, if we are unable to get the returns inorganically that we seek then, we will address capital return and not sit on a cash balance here.

Got it. Okay. That makes sense. I will get back in queue. Thank you.

Thanks.

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

Thanks. Good morning everyone. Hey, just one more here on the June two step, if I may. I am sure June is typically better than May, any quarter right. Good quarter, bad quarter, I mean can you just give us some kind of historical context of how significant the sequential lift was versus what would be normal?

You know what, I don’t know the answer to that question, because we were – everything that we look at around here is a function of relative declines. So, which is a – this tells you a lot about 2020 in the COVID era. But I mean, I think that the rate of revenue decline in June was significantly less than we saw in April and May, but – if I – of the top my head, Jeff, I guess the guys are furiously going through pages here, relative to seasonality I don’t know. I think that Andrey is going to have to follow-up with you on that one.

Okay. I am on his calendar I will do that with him. We had some discussion here I think on earlier questions about temporary actions. I think it’s pretty clear how you are going to kind of to manage those as they possibly come back. In that context, Rich, as we think about the other side of this valley and managing for growth on the other side, what are you thinking on incrementals? Is there significant headwind from stuff coming back or can you kind of manage this kind of I would guess maybe 30% zip code incrementals on the way back out there?

Other than bonus accruals, there is really no overhang of deferral of costs that have to snap back. I think the big question, I think there was a question earlier about it and I think this supplies, not just to Dover to everybody is, everybody has reduced travel cost right. Does it come back to ‘19 levels as a percent of revenue or not, I mean, the expectation there is absolutely not. I think that we have proven that we can run this business with less discretionary spending, than we may have thought is necessary exiting ‘19. So, what the quantum of that is, is I think it’s a little bit too early to tell, but we will be reflected in whenever we give our guidance for ‘21 for sure. The rest of it – you look at the end of the day, I think that we did a admirable job in managing furloughs and a variety of things. So I don’t expect that we are going to run significant industrial friction with over time or anything else in the second half. That’s my expectation. It won’t be perfect, but I don’t see that our incremental margins should have any kind of negative drag once we get to – hopefully soon, back to growth.

And just one last one if I could. So, on the M&A front, it sounds like you clearly have stuff in your sites now, which is the question of whether you can get it across the finish line. Should we be thinking kind of the similar size of what these – some of these recent bolt-ons have been or is there some bigger stuff in the pipeline? And I will leave it there. Thanks a lot.

Sure. Actionable it’s going to be similar size to what you have seen. There is some bigger opportunities that are out there, the bigger the opportunity, the more competition. So returns get tighter. So we will see on that front. But I am pretty confident on kind of the size that we have seen year-to-date. It’s just a question of, can we close them in the second half.

Your next question comes from the line of Julian Mitchell of Barclays.

Hi. Good morning. Maybe just the first question around the Imaging and ID segment, fairly, heavy decrementals in the first half given the gross margins and what happened with sales. I didn’t see too much color on the margin outlook on Slide 4 for that segment. So maybe help us understand, how you see decrementals in the second half and how much narrower those should be in that segment versus what we saw in Q1 or Q2?

They should – well, I mean, let’s start from the beginning here. In marking and coding, our margin which is substantially the bigger portion of that segment, our margins were flat. So, all of the decremental margin in that segment was from textile printing. And if we go back and take a look at sequentially last year, textile printing weakened in the second half. So, decrementals as long as marking and coding can hold their margin performance which we fully expect them to do should be less in the second half, just because of an easier comp.

I understand. Thank you. And then switching maybe to the DEP segment, there had been a very strong multi-year period for the sort of waste handling piece. It’s somewhat of a niche market. So I just wondered if you could give us any context around what you are thinking for the medium term there, given what’s happened to or what will happen to municipal budgets and what kind of upgrade cycle, you have already had there in recent years. Just trying to gauge, how optimistic you are in that business beyond just the next quarter or so?

I think that the business management of that particular business has been on the front foot. The non-municipal business, if you go look at some of bigger publicly traded operators, they have cut CapEx because of the profitability headwinds that they have had on their non-residential business. We would consider that likely, just to be deferred into 2021 as they manage their own cost structure. On the municipal side, we don’t see a lot of negative headwinds today, but considering the financing of cities and towns because of this COVID crisis, I think it’s a better than even bet that there is some headwinds coming there and because of that I think the management is taking action on its cost structure to accommodate that today rather than waiting for the last minute.

Thanks. And on the cost-out point, Rich, that you just made, why that Dover I think you had $20 million of restructuring charges in the first half in aggregate. Sorry if I missed it, but what’s the placeholder for the second half for that number?

We don’t – look, we are working on a variety of actions. I think we have got several footprint related actions in the pipeline, whether we will be able to action them in the second half or not, I am not entirely sure, but it’s probably then a better than even bet that we will take some footprint related charges in the second half. But I will give you the quantum when we get it all done.

Understood. Thank you.

Thanks, Julian.

Your next question comes from the line of Nigel Coe of Wolfe Research.

Thanks. Good morning guys. I am kind of curious on, obviously you have elected not to give any revenue boundaries, which I completely understand. But I would be curious how you see the rank ordering by segments in the second half of the year in terms of relative strength rather than weakness. I think in the past, Rich, you have called out Pumps & Process has been the leader, which doesn’t seem unreasonable. But do you still see the similar ranking to how you viewed the world back in the first quarter?

Look, I don’t think in terms of what we expect to relative to Q2 those nice arrows that Andrey put on the Slide on Page 9 is kind of where we things – where we think the moving parts are relative to Q2. And then you have got moving parts, because quite frankly, you have had some businesses that are operated through the crisis relatively well. So, we knew the Pumps & Process Solutions, because of it’s exposure on the biopharma side, was in a good position to kind of weather the storm as we got to the end of Q1 and it’s proven that so far. We expected to act – to hold profits flat for the full year is our expectation despite the headwind on the industrial pumps side. The marking and coding, quite frankly, has had an excellent performance holding margins year-to-date. Look the textile printing business, it’s just what it is, when you have your end market just absolutely blown up, we are just going to have to wait this out and that really will be hopefully a ‘21 story rather than a ‘20 story. So I don’t think that we think anything different today than we did at the end of Q1 in terms of the relative resilience of the individual pieces in the portfolio.

Okay. Very clear. Thanks. And then, cash is building quite nicely about $650 million at the end of the quarter. You normally run somewhere between $300 million to $400 million depending on the quarter. But if you don’t deploy capital, it seems unlikely you are going to be close to $1 billion by year-end. So my question is, I am not asking you to give us a number in terms of buyback etcetera, but I would be curious how you view cash – the cash buffer going into ‘21. Where do you feel comfortable, is it back to $300 million to $400 million? So, is it going to run higher going from here?

Yes. Look, I mean, I think you need to correct for dividend payments into the future, number one. And then after that, look, I think that we are not going to sit on a bunch of cash with negative yield on it for sure. But the buffer will flex up and down based on the probability of inorganic investment at the end of the day, right. That’s going to be there. So if we are returning cash in Q4, it’s because the pipeline that we see right now we don’t have any short-term requirement to sit on the cash. If we happen to sit on at the end of the year, I think that you can almost can through that as a positive signal, because it means we may be building cash because probability weighting of the pipeline looks good.

Right. And then quickly on inventories, the bulk of the inventory build was raw materials or the majority of it was. Is that a conscious decision to buffer the supply chain? Or this is just one of the things?

It’s purely on the backlog that we have going into Q3.

Got it. Okay.

So I would expect barring a snap back in revenue expectations for Q4 that we should come down in inventory, in finished goods inventory and industrial inventory in Q3, some.

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

Hi, yes. Hi, how are you? Can you hear me?

Yes. I can here you.

Yes. So question on supply chains, can you just talk about how much in terms of inefficiency in terms of supply chains have you seen in the second quarter. Anyway to quantify it and how do you see supply chains evolving into the second half?

It was not a material headwind in Q2. Now, having said that, we were not making a lot in Q2, so the areas that we did have constraints, it wasn’t like we were under the gun in terms of production performance. But for the most part our supply chains are relatively short considering the individual size of our businesses. So, we had a few headwinds here and there, but it was not material from a cost point of view in Q2.

Got it. So for the second half and going forward, no real changes in how you do business?

Yes. Well I guess it’s going to depend on the trajectory of all of the businesses, because, look at the end of the day, we have done relatively well on input costs. So, as demand went down, we will be able to extract some benefits in raw material prices and the like remains to be seen. I think we are probably bought forward through Q3 and probably a little bit into Q4, but we have got to watch the dynamics. If business activity snaps back, then we can expect oil prices to go up, so transportation cost to go up and the like. So we will keep an eye and right now, but right now on an input cost basis, we have been a beneficiary, I think in terms of input cost year-to-date.

Got it. Just a follow-up question, in terms of Europe, I think there was some talk back in May about Europeans trying to catch up post COVID. I think there was talk about VW being staying open in August or some talks about Italian staying open in August. Can you just give an update, anything different about how European businesses that you interact with will treat summer shutdown this year after COVID?

Andrew, that’s a good question. I will have to get Andrey to get back to you. I think on consumer goods we have seen decent performance which manifests itself in the marking and coding business. I think in heat exchangers, we exited on a positive trajectory from where we were at the beginning of the quarter. So, that’s kind of industrial applications, for lack of a better word. But I would have to get back to you on the – and look and then we had certain businesses in the portfolio like automotive aftermarket that in April and May were absolutely very low levels of activity. So, June relative to those two months as improved, but I don’t think we need to get overly excited because that base is relatively low.

Thanks a lot. I will follow-up with Andrey.

Your next question comes from the line of Josh Pokrzywinski of Morgan Stanley.

Hi. Good morning guys.

Good morning.

Hi, Josh.

So we played a good amount of kind of outlook thing go here and filled in both of the squares. I guess I will just I will try one more edge if you don’t mind? How much of the improvement in June, if you had to summarize was customers reopening versus kind of improving, I mean just turning the lights on again versus really kind of ramping back up into any activity levels?

Alright. You have got me.

I admit, it’s a little in here.

We had a lot of the businesses that we are absolutely shut in April and May from end market point of view. So you have a reopening aspect to it, and that’s why we were – when we were talking about the results of the end of Q1, we were basically saying look a lot of this hinges on whether we are right about June or not in terms of the trajectory and we ended up I guess, calling it right, for lack of better word, but our portfolio Josh, is so diverse, if any answer to that question is just not going to be applicable across the entire portfolio. So – which, quite frankly is a strength to a certain extent.

And then second question, I know obviously shippable second half backlog is something you guys talked a lot about today. What does that mean or how do you guys think about the plan for backlog at the end of the year? Is the plan basically saying what we are going to be depleted and orders need to pick to put us in kind of a normal position, exiting the year or is the level of kind of backlog depletion that you are contemplating kind of normal for lack of a better term.

I think, normal for lack of a better in the longer cycle business where it tends to be lumpy. The Maags of the world and the Belvacs of the world, they are actually building a back – a long cycle backlog into 2021 today. On the short cycle side, that is going to be more short cycle. So it depends on the trajectory between now and the end of the year, quite frankly. So we would expect certain businesses that have a seasonality to them like Refrigeration that will deplete a bunch of the backlog between now and the end of September, because generally speaking retailers don’t do a lot of installs in Q4 around Christmas time. But now, we will see if that’s changed – the dynamics change this year. So on the longer cycle businesses, I think right now the trajectory is good is as we deplete, we are building into 2021. On the short cycle ones, I guess it depends on when we get to the end of Q3 and what the outlook for revenue is into Q4, but I don’t see any anomalies in there.

Got it. Yes, I just wanted to make sure that nothing about some of the backlog conversion came at the expense of ‘21. It sounds like that’s not the case. So, good to hear. Thanks. I will leave it there.

Our final question will come from the line of Deane Dray of RBC Capital Markets.

Thank you. Good morning everyone.

Good morning.

Good morning.

Just a follow-up on the M&A outlook for the second half. And Rich, you talked about if it meets your return requirements, but typically in a downturn, there needs to be a process for seller valuation expectations to be reset. Do you think that’s happened already?

Not as much as we would like, but it is happening I think.

Was that – is that based upon books that are getting circulated, just how much...

Yes. I mean based on books that are being circulated and whispered numbers about expectation, it looks like its better than it was clearly in the second half of ‘19, but you still have this notion that the public equity markets are trading quite well. And then so we look at a lot of private companies, because the market segment that we are in and then there is this, well I want because of trading multiples that I see in the equity – in the public equity markets, but that’s – that never goes away, but it’s improved some. It’s not improved greatly, but it’s improved some.

Okay. That’s helpful. And then on the free cash flow for the second half and considering the strength of your free cash flow conversion this quarter, if you are liquidating inventory wouldn’t we expect to see some really strong free cash flow conversions in the second half?

Well, I mean, if you look historically, we generate a significant proportion of our full year cash flow in Q4, which we would expect but with the caveat of – we expect to draw down inventories quite a bit this year in the second half just because of the lower revenue number. Hopefully, if demand improves in Q4, we may have to reverse that, but my expectation is, is that the seasonality will remain constant, but we are probably not proportionately the way it’s been in the past when we have been growing the top line, where it’s been highly levered to Q4, it’s probably a little bit more evenly balanced this year.

Yes.

Got it. And then just last one on the pumps business, could you clarify whether the business is exposed to pharma, biopharma anything COVID related in your sanitary pumps?

It is exposed to biopharma, a material piece of it and that’s what has been driving the growth. And we are going to do an Investor Day around that particular business sometime, when Andrey late August, early September TBD?

Yes.

Where we will give you more color on it.

Terrific. Thank you.

Thank you. That concludes our question-and-answer period and Dover’s second quarter 2020 earnings conference call. You may now disconnect your lines at this time and have a wonderful day.