Dover Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2022

Key Takeaways

  • Record Q2 performance: Delivered record quarterly revenue with 7% organic growth and sequential year-over-year earnings and margin improvements despite challenging conditions.
  • Supply chain disruptions: Component shortages and COVID lockdowns in China negatively impacted shipment volumes, efficiency and fixed cost absorption across several businesses.
  • Strategic capital deployment: Closed the Malema acquisition on July 1 to bolster biopharma, repurchased $85 million of shares in Q2 and continues to pursue bolt-on acquisitions.
  • Guidance reaffirmed: Maintained full-year 2022 adjusted EPS outlook of $8.45–$8.60 and expect second-half margin gains from price-cost dynamics, volume growth and productivity levers.
  • Cash flow outlook: First-half free cash flow was constrained by working capital and inventory build due to high backlog and supply delays, but cash conversion is expected to improve in the second half.
AI Generated. May Contain Errors.
Earnings Conference Call
Dover Q2 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Dover's 2nd Quarter 2022 Earnings Conference Call. Speaking today are Rich Dovin, President and Chief Executive Officer Brad Seropak, Senior Vice President and Chief Financial Officer and Jack Thickens, Senior Director of Investor Relations. After the speakers' remarks, there will be a question and answer period. As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent through recording of this call. If you do not agree with these terms, please disconnect at this time.

Operator

Thank you. And I would now like to turn the call over to Mr. Jacticon. Please go ahead, sir.

Speaker 1

Thank you, Emma. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through August 11

Speaker 2

and a

Speaker 1

replay link of the webcast will be archived for 3 months. Dover provides non GAAP information. Reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available

Speaker 2

on our

Speaker 1

website. Our comments today will include forward looking statements based on current expectations. Actual results and events could differ from those and Chief Executive Officer. Due to a number of risks and uncertainties, which are discussed in our SEC filings. We assume no obligation to update our forward looking statements.

Speaker 1

With that, I

Speaker 3

will turn the call over to Rich. Thanks, Jack. Good morning, everybody. Let's start with the performance highlights on Slide 3. Our team delivered a strong second quarter performance, which led to record quarterly revenue and sequential year over year earnings growth.

Speaker 3

Officer Consolidated organic revenue growth of 7% in the quarter as our businesses continued to capitalize on strong backlogs and pricing actions continued to take hold. We believe our ability to execute and provide needed capacity in today's challenging environment has led to noteworthy share gains in multiple markets, Officer, which is positive for our continued growth. Component shortages and COVID lockdowns in China did negatively impact shipment volumes and consequently efficiency and fixed cost absorption in several businesses during the and Fixed Cost Absorption in several businesses during the period. Despite these difficulties as well as FX headwinds, our absolute Segment profit increased year over year and operating margin improved sequentially in the quarter, driven by cost controls, good volume and meaningfully improving price of Cost Dynamics. Our strong balance sheet provides flexibility for value creating capital allocation initiatives.

Speaker 3

We are investing in capacity expansions and productivity improvements across many of our operating companies to capitalize on secular revenue growth opportunities, and Company. The recently announced Malima acquisition will enhance our biopharma business closed on July 1, and we continue our pursuit of attractive bolt on acquisitions. We also repurchased 85,000,000 Officer's worth of shares in the Q2, and we'll continue to proactively evaluate capital deployment alternatives through the remainder of the year. Our strong backlog, constructive demand outlook and execution playbook position us well to deliver growth in revenue and earnings amidst an increasingly uncertain macroeconomic backdrop. We are maintaining our 2022 adjusted full year guidance of $8.45 to 8.6 of $0.05 per share.

Speaker 3

I'll skip Slide 4, which shows the detailed quarterly results. Let's move on to Slide 5 to discuss segment performance. Engineered Products revenue was up 19% organically in the quarter on broad based strength across the portfolio in major geographies as well as pricing actions. And Chief Executive Officer. Margins were up 130 basis points sequentially, and we expect the trend to continue through the second half as price cost spread continues to roll forward.

Speaker 3

Officer. Clean energy and fueling volumes were driven by strength in clean energy components vehicle wash and below ground fueling components offset by the expected roll off of EMV related demand in North America, which peaked in the comparable quarter last year. Officer. Margins in the quarter were down year over year on lower volumes and constrained inputs and to a certain extent mix. The sequential margin improvement was significant, however, at 4 10 basis points versus last quarter driven by improving cost dynamics and product mix.

Speaker 3

Officer. In Imaging and ID, our volumes in our core marketing and coding business were constrained by electronics and other input shortages as well as COVID lockdowns in China, Officer. This offset growth in our serialization of brand management software businesses. FX is a material negative headwind to and Company. Revenue profits in the segment given its large base of international revenue.

Speaker 3

Q2 margins in Imaging ID were impacted by lower volumes and production stoppages in Asia, but improved sequentially. The team has done a good job in cost containment and finding alternative suppliers to alleviate supply chain constraints, and we are confident about good margin conversion in the second half. Pumps and Process Solutions posted a 7% and the growth is on strong double digit growth in our core non COVID biopharma business as well as robust growth in medical and thermal connectors, Officer of Industrial Pumps, Polymer Processing and Precision Components. Operating margin in the quarter remained robust at 31%, plus Officer, despite a mix shift towards industrial components. Top line and alignment and sustainability technologies continued to be strong, posting 11% organic growth on solid volume in heat exchangers and beverage can making as well as pricing across all businesses.

Speaker 3

Volumes in of Retail. We're constrained by supply chain challenges, which negatively impact cost efficiency and will result in shipments pushing out into Q4. Comparable and sequential margins were up in the quarter on better mix and price cost, though is partially offset by production efficiencies and input shortages. As you can see, we're marching towards our mid teens operating margin target Officer in this segment. I'll pass it on to Brad here.

Speaker 4

All right. Thanks, Rich. Good morning, everyone. Let's go to Slide 6. Officer.

Speaker 4

The top bridge shows our organic revenue growth of 7%, driven by increases in 3 of our 5 segments. Officer of Automotive, resulting in $0.08 negative EPS in the quarter. We expect FX to remain a headwind for the year compared to our prior expectations. In all, changes in foreign currency translations from April until today are estimated to have a full year of 2022 impact of an incremental $0.10 M and A contributed 49 of the top line in the quarter, a product of $84,000,000 from acquisitions, partially offset by $34,000,000 from the Unified Brands divestiture. Officer.

Speaker 4

We saw organic growth across the U. S. And Europe. Asia was flat organically in the quarter as China was down Operations and are currently seeing recovery in production and regionally sourced components. On the bottom of the chart, Officer.

Speaker 4

Bookings were down year over year primarily due to foreign exchange and a one off $74,000,000 de booking Officer of Babbage Can Making due to customer financing limitations. Likewise, our backlog was negatively impacted by the aforementioned de booking as well as the negative impact from FX. Let's go to the earnings bridges on Slide 7. Before I get into the charts, I want to remind everyone we now exclude the impact of acquisition and amortization accounting from our segment earnings, with our consolidated adjusted EPS. This change had no impact to our GAAP earnings or adjusted EPS.

Speaker 4

Officer. Now to the charts. Segment earnings were up $9,000,000 in the quarter on improved volumes and price costs, but partially offset by supply chain constraints and foreign exchange headwinds. Segment margins were down 80 basis points. Officer.

Speaker 4

Adjusted net earnings improved by $10,000,000 driven by higher segment earnings and favorable corporate expenses, partially offset by higher taxes. Officer. The effective tax rate excluding discrete tax benefits was approximately 21.5% for the quarter and Company. Discrete tax benefits were lower than the prior year at $4,000,000 in the quarter or of approximately $0.03 of EPS. This compares to discrete tax benefits of $0.08 in the Q2 of 2021.

Speaker 4

We expect our back half tax rate to be in the range of of 21% to 22%. Our cash flow statement is on Slide 8. Free cash flow declined in the first half of the year, driven by working capital investments and inventory necessitated by the high backlog, Officer. Supply chain constraints exacerbated by input shortages preventing completion of some work in process inventory in the quarter Officer as well as higher receivable balances on growing sales. The quarter also included 43,000,000 and Tax Payment related to the sale of Unified Brands.

Speaker 4

Capital expenditures were up year over year and are principally in support of our robust growth expectations across several businesses. Free cash flow was 6% of revenue in the quarter and would have been 8% excluding the UB tax and Chairman. We expect cash conversion to improve in the second half of the year, more in line with typical cash conversion seasonality in our businesses, driven by earnings conversion and inventory reductions. With that, I'm going to turn it back to Rich.

Speaker 3

All right. Thanks, Brad. Let's go to Slide 9. This slide is our current view of the demand outlook, operational environment and margin drivers for the remainder of 'twenty two by segment. We expect top line and engineered products to remain robust based on elevated backlogs and implemented price increases.

Speaker 3

Officer. Vehicle Services continues to see a constructive demand environment across all geographies with particular strength in North America. Demand for Officer. Refuse Collection Vehicles and Parts remains very strong and our Connected Collections digital business is significantly outperforming expectations. Officer.

Speaker 3

Our backlog includes fully implemented price actions that support the projected recovery in margins. We expect volume, productivity and improved pricecost of the year. We expect to be positive drivers of earnings accretion and margin improvement in the second half of the year. Officer. At Clean Energy and Fueling, we expect to see robust growth in the second half of the year after a roughly flat first half.

Speaker 3

We continue to see solid demand in North America Officer for below ground retail fueling, fuel transport, vehicle wash and software solutions. Our acquisitions in clean energy components continue to performed their year 1 acquisition models and we have already begun to deploy capital in these businesses to expand capacity and improve productivity. We expect margin performance to improve in the second half on stronger volumes and mix, which will drive improved full year margins in this segment. We expect volumes in imaging and ID to improve as component shortages reside with China recovering from 2nd quarter COVID shutdowns. We continue to work to identify alternative electronics providers to alleviate component bottlenecks going forward, and we're beginning to see Officer.

Speaker 3

Some inquiries and improved order rates for large scale printers and digital textile printing, a positive development in the industry that has experienced a prolonged recovery. We expect margin to improve in the second half and better volume and cost containment while keeping a close eye on FX. Officer. In Pumps and Process Solutions activity industrial pumps remain solid. Polymer Processing has booked several big projects that lay the foundation for a very strong for the second half, and we recently received our single largest order ever for the business in early July.

Speaker 3

Officer. Precision Components continues its upward trajectory in both bearings and compressor components across all geographies as investments in energy sector pick up. We expect the current below normal demand trend in biopharma to continue for the balance of the year as biopharma manufacturers Officer. Finished transitioning their R and D pipelines and production systems from COVID related businesses to other growing biologic therapies. Officer.

Speaker 3

We expect Climate and Sustainability Technologies to post double digit organic growth this year, driven by large backlog and pricing initiatives. Demand remains robust across all lines in food retail, while input shortages have hampered food retail shipments, they are expected to improve, Officer, resulting in a catch up of deferred shipments into the second half of the year. Our heat exchanger business is positioned well on strong order rates across all geographies and end markets, in particular Officer and the European Heat Pump Business. And Belvac Beverage Packing Equipment of the company. Our business continues to work through its record backlog.

Speaker 3

We have already been awarded new projects in Q3 to materially offset the deboking in Q2. Expects margins to improve year over year on volume leverage and positive price cost dynamics and normalizing supply chains. Let's go to slide 10. I presented this slide at a recent conference, but it bears repeating as not everyone attended the event and the topic continues to be actively debated. There is a view that booking rates are the sole predictor of demand and revenue growth and negative year over year bookings on top of a record 2021 are somehow spelling trouble.

Speaker 3

Officer. None of us know what the future holds, especially in the current environment, but let's level set on the basics here. First, if you look at our revenue and bookings, they're and Company. Historically been correlated, but because of demand wave coming out of the pandemic coupled with extended lead times from supply chain issues and some change in product mix. Our bookings jumped in 2021 to $9,400,000,000 well ahead of our revenue last year and our guide for 'twenty two revenue.

Speaker 3

That resulted in backlogs that are record highs, roughly double where they have normally been on a 12 months revenue basis. That over time Officer should come down, which is healthy because it means our lead times are coming down and global supply chains are improving. Our backlog is sufficient to We've seen revenue growth for a significant period. And it's worth noting that our backlogs midway through the year are still higher than they were at the beginning of the year. And despite a decline in bookings, our book to bill ratio so far this year is still above 1 and in line with historical trends.

Speaker 3

Officer. Our current booking and backlog trends should position us to enter 2023 on solid footing. Let's move to Slide 11. And we show historical first half versus second half margin performance. Historically, Dover has generated higher margins in the second half of the year.

Speaker 3

Officer. Last year was an anomaly as input inflation and supply chain constraints and COVID shutdowns hit the second half. Officer. Our sequential margin trajectory is upward and progressing largely as expected, and we remain confident about the positive and the second half margin dynamics in line with historical seasonality. Although I would note that Q4 will contribute more to and as we liquidate a large work in progress balances of inventory.

Speaker 3

Make no mistake, we remain concerned with the inflation trajectory and general macro backdrop and the different demand scenarios that are possible in 2020. We have a playbook to act decisively to adapt both from a cost structure and working capital perspective and Officer. Demand conditions. But sitting here today, looking at our backlogs, significant portions of our portfolio were sold out for 20 of 2022. So we would expect order rates to inflect positively as we go into the second half.

Speaker 3

We have levers that are not demand dependent. We have and Chief Executive Officer. Positive contributions from our organic capital deployment and productivity initiatives and our 4 enterprise pillar efforts will positively contribute to next year's earnings. We also have very interesting and underappreciated portions of our portfolio Officer, where secular demand growth will outperform the broader industrial market. In closing, I'd like to thank my colleagues around the globe for their continued dedication to strong performance in a demanding operating environment.

Speaker 3

And Jack, I'll hand it back to you, and we can get to the Q and A.

Operator

Officer. We'll take our first question from Andrew Obern with Bank of America.

Speaker 5

Hi, guys. Good morning. Just you mentioned FX impact in the quarter, dollars 0.08 What was it versus expectations? And what does the new guide assume for FX impact on EPS basis versus

Speaker 2

the previous guide?

Speaker 4

Officer. Okay, I'll take that. Good morning. Within the quarter, the impact was about $0.02 of our against

Speaker 3

our expectations.

Speaker 4

I said for the full year from here forward, it would be about $0.10 And I think You're asking me specifically what kind of forecast rate are we using. I could say we're using a euro of about 1.05. Today, it's trading at about 1.02, so maybe the headwind is a little bit higher, but we'll see. We'll see what happens now going forward, especially with the ECB raising rates. Officer.

Speaker 5

Got you. And just another question on commodities. Commodity is broadly down from their peak. So how should we think about you definitely highlighted that supply chain is getting better into the second half, but how Should we think about that flowing into Dover COGS? Is it a 6 month lag?

Speaker 5

Is it a 12 month lag?

Speaker 3

On the commodity side, we get the majority of it in the second half, right? So all of that has been in inventory for some period Officer. What we've been waiting for is the pricing to roll forward. So we've seen a significant improvement in Q2 Officer. And the expectation is on the backlog the raw materials being fully priced in the back half for the year, and those businesses that are exposed to raw materials, and that's why we're confident about the margin accretion potential.

Speaker 5

And is there any sort of incremental margin just as FX create some incremental headwinds? Is there incremental margin of safety from commodity decline as we're thinking about towards exiting the year?

Speaker 3

That's too complicated for me, Andrew. Officer. Over the last, what, couple of weeks, we've watched a significant devaluation of the euro against the dollar, and we were modeling if that Officer. But it's we're going to have to see and remember too that we're going to convert at Average rates, so you got to be careful about taking spot rates and then trying to run the mass on the second half of the year.

Speaker 4

But I would just add that as it relates to price Commodities. I feel good about the fact that all of our price actions are enacted going into this back half. And so We'll see what happens with commodities. I mean that's basically all we can say is we'll see.

Speaker 5

Rich, Brad, always a pleasure. Thanks.

Speaker 6

Thanks.

Speaker 3

Officer. Our

Operator

next question comes from Jeff Gargu with Vertical Research.

Speaker 3

Officer. Hello, everybody. Jeff. Just 2 from me. First, Rich, just on this Velvac We tend to think of the customers Coke, Pepsi, Crown, Ball, etcetera.

Speaker 3

So a little surprised to hear somebody had of financing issue. Could you just elaborate a little bit more on what happened there? And then maybe the backfilling you're Talking about is somebody stepping in and taking those slots? Yes. I mean, look, capacity has been constrained in can making for Officer.

Speaker 3

3 years now, right? And that's what's been driving a lot of the capital investment by the can makers. But what you've also seen is a lot of companies that rather than go into the can makers are vertically integrating. That happened to be a particular project in Eastern Europe, Which was a vertical integration play with the blow up of the equity markets and financing conditions changed. The order got canceled.

Speaker 3

But having said that, like I said, subsequent event, we got a $40,000,000 order last week. Officer. So we had to de book it. That's life. None of the revenue and earnings for that particular order impact 2022.

Speaker 3

That was actually a 2023 project. Great. Interesting. And then just on the trajectory for the year here, I mean, clearly, what you're saying about of the company's press release. Price cost and trends would indicate a sequential improvement in Q3 versus Q2, but you also are signaling a little bit more Officer.

Speaker 3

Could you just give us a little more color on how you expected the back half to play out here just to make sure we're all properly Sure. Look, I mean, at the end of the day, this was the quarter where we really had to chin the bar because that was the highest Officer. Since the demerger or the spin off that we had to chin the bar. And to the extent that we chin the bar, considering Everything was going on. This is the one we're probably most worried about this year, and we've changed the bar.

Speaker 3

So my comment on Just the seasonality of the back end of the year, you can see the chart that we put into the presentation. I would just caution that because of This issue about all this work in process that we have, I would expect that to continue through Q3, of 3, meaning that we're going to actually pushing a lot more out the door in Q4 than we historically have been. As you know, generally speaking, we would kind of Officer. Run flat out and then run for cash in Q4 historically. The supply chain issues are not repairing themselves, Officer.

Speaker 3

At least sitting here today at the speed that would allow us to deplete a significant part of our backlog and our WIP in Q3, It's going to move into Q4, which is all baked into full year forecast. So it was more of a comment of just be not that we give a damn about quarterly and the results we're a full year company here, but I think that Q4 will be higher proportionally in terms of earnings than the historical trend. Officer. Thanks a lot. You're welcome.

Operator

Our next question comes from Scott Davis with Melius Research. Officer.

Speaker 2

Hey, good morning, guys.

Speaker 3

Thanks, Rich.

Speaker 2

The sharp move we saw in FX, I mean, is there a point where there's a demand destruction challenge? Is there Perhaps maybe framing how much of your product is kind of moving from dollar based regions to non dollar based regions would be helpful in that regard. But is there a certain point where you start to get nervous?

Speaker 3

Officer. Well, I'm more nervous about the European macro than I am about FX. We don't ship Officer. Hardly anything from the U. S.

Speaker 3

Into Europe where we run into problems with eurodollar Officer of any consequence. It is a bit of a and I don't think that there's a significant competitive advantage that we've been taking advantage of with of the lower dollar versus the year over time. So I don't from a demand point of view, I don't think FX is an issue. I think that European macro is more of an issue. We don't see the effects of it today, but I mean we're not naive.

Speaker 3

And I mean things are Great with energy costs where they are and everything else there.

Speaker 2

And how about emerging markets where perhaps they have to buy in U. S. Dollars of the product.

Speaker 3

Again, we do a lot of for region, in region. Officer. The products that we ship into emerging markets are most how do I want to put this? I mean, Officer. There is no Asian competitor for MOG, for example.

Speaker 3

So we'll come under some pressure from a pricing point of view. Officer. Maybe in the future, if we assume that currencies remain the dollar remains strong against emerging market currencies. But right now, Officer. I think that between some of the bigger capital goods side, like the MOGs and the Belvacs of the world, I think we can weather

Speaker 2

that. Okay. And then just quickly last, the printing ID business, any of your consumer goods customers Delaying orders or talking about any slowdown demand there?

Speaker 3

No, not really. I mean, We just had some operational problems in Q2. I mean, we are levered from a production point of view to Asia, to China specifically. Officer. So we've had some mission.

Speaker 3

We had to shut our operations down there in Q2 for a period of time during the lockdown, Officer. And we are caught up in some of the supply chain on electronics components there that we and Company. We ended the quarter with a decent improvement there. So I would expect that at least on the printer portion of the business, we'll catch up in the and half, we do not see deterioration

Speaker 4

on the consumable side. I would say we lost in that segment about 4 points of growth because of the shutdowns in China and the component supplies within that business, which catches up in the back half.

Operator

Officer. We'll go next to Joe Ritchie with Goldman Sachs.

Speaker 2

Officer. Thanks. Good morning, everyone. Hey, Rich, can we start on pricing and the expectation of the company. 1st for the rest of the year that you guys set up that 0.6% of price this quarter.

Speaker 2

And then there's a lot of discussion right now around Officer. Base mill prices are deflating. How are companies going to have to get back some pricing as commodities deflate? Can Can you just provide some context for how that's going to work across your business?

Speaker 3

Yes. It's going to be an interesting dynamic. Number 1, price cost Officer. In Flex, materially positive in the second half. All of our pricing is done for the year.

Speaker 3

So any pricing action we're taking now is More of a 'twenty three issue. Raw materials costs are coming down. We are not we didn't reprice our backlog of the company's business. We have no intention of repricing our backlog into the tailwind, and that is something that's been an active dialogue Officer. With our customers now for, it seems like forever, but I guess the last year.

Speaker 3

Officer. If prices have to come down because raw materials are deflating, that's actually positive to margins Because if we look at price cost on a rolling 12 month basis, you basically took a big headwind in the back of the year. You end up mostly, at least on the Capital goods side, a net neutral over time. It's just you have the spread between the liquidation of the backlog timing. So if it comes down in pricing, yes, it is a headwind to revenue, but it's actually a positive to operating margin.

Speaker 2

And maybe just kind of following up on that, on the piece of the business that's not backlog sensitive to most of your business, right, the short cycle piece. Would you expect to be in a deflationary backdrop, dollar neutral? Would it be dollar Positive. I'm just trying to get a sense of you guys to keep some of it as we kind of progress over the next 12 months.

Speaker 3

Officer. Yes. On the short cycle portion of the business, I wouldn't expect that there's not that dynamic of input cost Officer. Tied to market pricing. I mean that's really the capital goods portion of the business, both us, and our customers.

Speaker 3

That is an ongoing dialogue just because of the proportionality of the input costs, and you can see what the dynamic is on the raw material side. On the short cycle portion of the business, there is not that direct link. So I Officer. I mean, barring the competitive environment, becoming incredibly aggressive in 'twenty three, I would expect that it's our intention to keep The pricing that we've laid in.

Speaker 7

Got it. No, that's helpful.

Speaker 2

If I could just sneak one more in. Just the funder and process margins Finally saw some degradation this quarter. You guys have been kind of calling out mix in that business for the last couple of quarters. Officer. Is this kind of like the right new level, this like 31% type margin?

Speaker 2

Do you expect further degradation in the coming quarters?

Speaker 3

Yes. Look, I mean, let's not get into quarter to quarter performance. I think that we've been clear over the last 18 months or so Officer. That 30% margin is pretty much the new normal. There'll be some volatility quarter by quarter clearly based on mix.

Speaker 3

Officer. And it's not all bad at the end of the day. I think on the biopharma side, the demand as our customers convert is going to be slow, as I said, in the second half of the year. We believe in terms of our ability Officer. To retain our share of that marketplace is absolutely solid, respect in, in a significant amount of our customer base.

Speaker 3

So it's just as Officer of Biopharma Transitions. And remember, too, there's other portions of that business that are dilutive to that margin. So when we post Organic growth number, I believe it was 7%, more or less in DPPS for the quarter. A lot of that growth Officer. It was from the industrial components side, which is diluted to that margin.

Speaker 3

We don't try to manage segment margin. Basically, we're pushing all these companies as much as we can. So if we have of dilutive mix. That's not necessarily a bad thing. We want every piece of that segment to grow over time.

Speaker 3

And we're actually quite pleased with the performance of MOG. As I mentioned, that is its backlog is going up Officer, well into 23 now and the turnaround that we're seeing in Precision Components, which is levered to the energy sector.

Speaker 2

Makes sense. Thanks, guys.

Operator

We'll go next to Steve Chose with JPMorgan.

Speaker 2

Hey, guys. Good morning.

Speaker 3

Hi. Good morning.

Speaker 2

Just to be clear on kind of these price cost questions, I think Andrew was trying to ask about when you guys would see deflation Given where commodity prices are today, I interpret your answer as it's not like you're seeing it in the second half. That's more of price catching up with the inflation. So at what point would you see lower steel, lower copper run through your revenue line item? 6 months, 9 months, 12 months, like, what's the timing on that? Just to be clear on that answer.

Speaker 3

Sure. Officer. I guess now we're going to go operating company by operator. I'll give you two examples. I mean, I think in SWEP because that has Officer.

Speaker 3

Got an inflatordeflator that probably rolls every 90 days or quarterly. You would begin to see that a little earlier. It's net neutral in Swept in terms of its operating margin or its performance. In the other capital goods side, Specifically on ESG, we wouldn't see that until mid next year probably based on backlogs.

Speaker 2

Right. So kind of blended for the cap goods businesses 6 months?

Speaker 7

Yes.

Speaker 2

Okay. Yes, yes. So beginning of next year. So you're not seeing that Officer. And this year is a point in that that's mostly price catching items.

Speaker 3

Look, I think it's completely manageable. I mean The issue is going to be what happens to the competitive environment going into 'twenty three, and we'll see There, depending on what demand looks like. For us, I like where we stand in terms of our competitive stacks, Officer. Right. The vast majority of our business has very few global competitors, and I don't expect to see No, if demand comes down, then you've got some significant headwinds in terms of the pricing environment from a competitive point of view outside of What's happening in raw materials?

Speaker 2

Got it. And then just a question on orders. Your reported orders, Including that deep backlog, the cancellation. So are you saying that those orders next in the third and Or just the run rate for the second half, but those will actually be up sequentially because of that impact of the $75,000,000 or whatever it is or maybe just

Speaker 3

Officer. What I can tell you is that the bar that we add to Chin for Officer. Margin and operating profit and order volume was Q2, right? Officer. So we've been guiding for a year now that this can't go on forever and orders are going to come down.

Speaker 3

But if you noticed, I'm Because FX has an impact not only on revenue and profit translation, but on balance sheets also. So Officer and Roland to take care of that over time. Again, I'm not worried about our orders. I mean, we've got a significant portion of our portfolio that's Sold out for the year.

Speaker 2

Right. So can book to bill be above 1 on a reported basis

Speaker 3

for the next couple of quarters? Can it be? Yes.

Speaker 2

Okay. Is that in your forecast?

Speaker 3

To be perfectly frank, I don't we don't measure projected book to bill, right? We've got revenue forecast and earnings forecast, Officer. No one's running around trying to count orders into the future.

Speaker 2

Except us. Thanks.

Speaker 3

Yes. Well, we We had a discussion around here about book to bill orders and backlog, whether that's too much is too much. But at the end of the day, look, This notion that order rates coming down is somehow a precursor of 'twenty three demand. I think I'd be very careful about that.

Operator

Officer. We'll go next to Andrew Kaplowitz with Citigroup.

Speaker 6

Good morning, guys. Rich, maybe just a follow-up on that. Can you give us a little more color into the puts and takes of your revenue guidance for the year? I know We just talked about currency and length, but you actually raised your organic growth guide for the year despite lowering expectations a little bit in DII and DPPS. Does your Higher organic growth forecast come from more momentum in specific businesses, DP, DCF or is it more confidence in supply chain easing?

Speaker 3

Well, let's see. Number 1, the back half is actually an easier comp. I'm going to repeat myself again. Q2 was the comp that we had to Chin, and we actually grew over Q2. So If you look at the growth that we posted for Q2, which was the highest bar that we had to Chin, if you take a look at what happened in the second half of last year, Officer.

Speaker 3

Brad went through what our estimates are on FX, And we're going to be like everybody else. We're just going to have to watch that as it progresses through the year. And Officer. Look, if you take a look at our cash flow, which is negatively impacted by largely inventory, Officer. We've got a significant amount of not so much finished goods, but a lot of raw materials and WIP.

Speaker 3

And our intention is to convert a significant portion of that, which means selling it at the end of the day against our backlog, Officer, which drives the top line and we are going to run like crazy between now and the end of the year to liquidate that inventory position, Officer, which should be really good for the cash flow going forward. I mean, the one watch point is going to be how much we ship Officer in December and whether that gets hung up in receivables or not, but you know what, that's irrelevant, quite frankly. It's a timing difference. Officer. We're looking at the one that we're driving at the most is we've got to clear that whip out of inventory, which would have the knock on effect of clearing the raw material position that we have.

Speaker 6

Officer. And then Rich or Brad, maybe I can follow-up on the cash flow. Obviously, you had your initial cash flow guide out there, 13% to 15% of sales. I know cash flow improved sequentially, but as you were just talking about Rich, it seems pretty back end loaded. Officer.

Speaker 6

Any update on sort of that original guidance or how to think about cash flow conversion over the next couple of quarters?

Speaker 3

Look, Andy, it's basically what I said, Right. There's nothing changed here about the cash flow dynamic. Our earnings are going up for the year. That's a positive. We have brought in more inventory because of all these supply chain issues.

Speaker 3

I'm not worried about it because our inventory position proportionally against the backlog that we have is fine. We're going to flush a significant portion of the inventory in the second half of the year. What happens in payables and receivables based on timing and everything else? I think the only watch and Chief Executive Officer. The next point would be on the receivables balance at the end of the year, but then the world doesn't end on January 31.

Speaker 3

I'm not calling out that we've got Officer. And we're going to drive towards making it. But I think from a cash flow and Chief Executive Officer. We're in no different position than we've been in the past and our earnings are higher. Officer.

Operator

Our next question comes from Jeff Biedzinski of Morgan Stanley.

Speaker 3

Officer. Hey, good morning, guys. Rich, you mentioned there, I apologize, I jumped on the call a couple of minutes late, In Washington Europe maybe a little bit more closely than kind of worrying about the macro at large. Anything in terms of progression through the quarter order rates, Mix of business, I know there's a couple particularly economically sensitive businesses there. I would think the retail fueling when Officer.

Speaker 3

Dauer, gallon, gas maybe isn't feeling awesome, but anything there that you guys you feel the need to point out? No, Nothing. It was just a comment on a watch item, where I think the question was more, are we more worried about FX? FX is what it is At the end of the day, I don't think it changes the dynamic where we think it's a headwind of our ability to compete Officer. In the Eurozone because of some that we're shipping dollarized products into Europe, we don't.

Speaker 3

Clearly, Europe from a macro point of view is a watch item. We're not naive here. We don't see it yet, but we're paying very close attention to it. And then we run a variety of scenarios depending on what we think could happen to demand what we do to our cost structure. And that was the comments I made in the presentation of we've got a playbook here that says When things start moving, how quickly we can move, and we believe that we can move faster than the macro models.

Speaker 3

Officer. Got it. That's helpful. And then I guess maybe zooming out a little bit more strategically, you've been talking about near shoring or kind of broader supply Officer. Investment by the industrial world for a while now.

Speaker 3

At the same time, you're seeing some of that, I guess, start to improve. Anything that you think with improvement people sort of forget about and move on from? How are you guys thinking about this Transition maybe from like triage mode to how you want to address some of these supply chain issues on a longer term basis. Officer. Yes.

Speaker 3

Look, I mean, we've been the recipient, unfortunately, in the first half of the year of our own and the suppliers going through that transition, which has led to some of the headwinds that we've seen. So I think from a longer term perspective, it's healthy. So you see Officer. Quite a bit of capital investment going in, let's call into NAFTA, for lack of a better word, but that's these are industrial products So they're not easy to move around, and we're all kind of going through that transition. Interestingly, From a CapEx point of view, our CapEx related businesses are very strong.

Speaker 3

So the order rates that we're seeing in Belvac and MOG and what's going on in precision components and what's going on in Refrigeration. Those are all, let's call them, CapEx related businesses. And from a backlog perspective and a demand perspective. I mean, they're all sold out for the balance of the year, and we're actually booking into 'twenty three. Officer.

Speaker 3

So I know there's a big debate going on out there between consumer recession versus industrial recession. Officer. The CapEx sitting here today, I think that we're more positive than negative in terms of CapEx Officer.

Speaker 8

Our

Operator

Our next question comes from Deane Dray with RBC Capital Markets.

Speaker 7

Thank you. Good morning, everyone.

Speaker 3

Good morning. Officer.

Speaker 7

Hey, maybe we'll just stay on that same CapEx theme. Any change in your thoughts regarding CapEx Spending expectations for the year for you guys.

Speaker 3

Of our own. No, no. I think that What we have modeled in for ourselves through the year is we're all done. So I mean, I don't think we could we can't and what we've got in the plan now. So no, I don't think barring a customer showing up and saying, I want X, Which clearly we would invest behind.

Speaker 3

Right now, I think that we're done in terms of commitments and you'll see it reflected in the cash flow as we go through the balance

Speaker 7

Got it. And yes, in reference to the early discussion about counting orders, Can you talk a bit more about that single largest order? You said it was in pump and process, what the application is, How competitive and how might the margins shake out versus the segment normalized average?

Speaker 3

It's polymer processing where the order came from. It's in Asia, And it's slightly dilutive to the consolidated margin, but still very good margin.

Speaker 2

Got it. And how competitive was that?

Speaker 3

It's they're all competitive. Having said that, It's better to be competing with against 2 other people versus 10 people. And by and large, the vast majority of the portfolio is Competing against 2 or 3 people. So it's competitive, but not crazy.

Speaker 7

That's helpful. And just last one, if

Speaker 3

I could. Last quarter, when

Speaker 7

we talked about pricing, Rich, you said you might be pressing more along the lines of surcharges. Officer.

Speaker 2

How has that played out?

Speaker 3

You know what, I don't I think that because of the dynamics of raw materials, we haven't Officer. We had to do surcharges since then. I think it was an option that we were basically, I think that When we had the discussion last time was we've done a significant a lot of pricing here that's all modeled in the roll forward for the balance of the year. So Kind of like our pricing was done assuming what we have in our EPS forecast. And that I think the response to the question is, Well, what if we see input costs go up again?

Speaker 3

What are you going to do? And the answer was, at this juncture, we'd probably take a look Officer. At doing surcharging, we've done some but very little because of the fact that we haven't seen the degradation. We actually it's more of a Officer. Tailwind going forward input costs and it's been a headwind over the past year.

Speaker 7

That's really helpful. Thank you.

Speaker 3

Officer. You're welcome.

Operator

Our next question comes from Brett Linzey with Mizuho Magus.

Speaker 3

Hey, good morning all.

Speaker 6

Good morning.

Speaker 4

Yes, I wanted to come back to capital deployment. You made

Speaker 9

a comment about proactively evaluating other various of Alternatives. Could you just put a finer point on that? Is it buyback, special dividend? What's all under consideration? And then if it is the buyback, Would you consider levering up or was this just a balance between bolt on buyback and free cash flow?

Speaker 3

I think that the capital markets would have to get pretty grim before we levered up to do it. So it's more on deployable cash flow, Officer. Meaning that if we were if our pipeline from an inorganic point of view was low, that we would not for capital return to shareholders. Our bias there is share repurchase over doing a special dividend. As we sit here today, Officer.

Speaker 3

That's always discussion with the Board of Directors.

Speaker 9

Okay, great. And then just shifting to the European pump business there. How large is that on a run rate basis currently? And I know the order rates have been pretty good there, but could you just speak to the scope of further opportunity in that business? And then specifically, how Dov is competitively positioned for the opportunity?

Speaker 3

Yes, we don't really get into giving out Revenues by segment because that's a slippery slope that these conference calls will last 1000 years.

Speaker 4

Officer. It's a

Speaker 3

good it's material to the full year revenue. I think the reason that we called it out was the Officer. So it's a good order proportional to the revenue. That business is sold out for the year. So it's all 23 that we're booking for now.

Speaker 3

So it's a precursor for the solidity Officer of that particular business' revenue stream going into 2023. Got it. Thanks. I'll pass it along. Officer.

Operator

Our final question comes from Miguel Coe with Wolfe Research.

Speaker 8

Good morning. Thanks for the question. Just I thought it'd be sort of go back to the guide. Maybe Brad, this is for you. So $0.10 Officer From FX, the headwinds at current plan rates.

Speaker 8

Sounds like that's offset by a point Better organic growth. Is there anything else in the plan that's moving around? It seems like tax is coming in a bit better, but anything on corporate, etcetera, that we should bear in mind?

Speaker 4

No, I don't think so. I think corporate was a little bit favorable in the quarter for reasons of booking accrual rates and things of that nature, Officer. The corporate kind of gets back to a normal pace in the back half of the year. As I said, the headwinds is $0.10 versus our last expectation. That's built into our guide, Same as it is on the revenue side.

Speaker 4

So revenue and earnings are reflective of what we said was our current thinking about FX rates. Officer. The organic increase, another way to think about that is we chinned the bar in Q2. We had a good Q2. We see that helps us for the full year as well and solidifying price.

Speaker 4

It's also helpful. So there's no real huge movements there. It's more refinement than anything else.

Speaker 8

Officer. Great. That's great. And then Rich, maybe for you, a bit more expansive question on Europe. Officer.

Speaker 8

The top down view in Europe is dismal. The micro sort of company data is actually coming in a lot better, a little bit surprising. So just wondering What you've seen on the ground in Europe, and I'm just wondering how concerned are you by cost of gas rationing, NG inflation? And are you seeing anything sort of unusual in terms of behavior from customers in Europe right now?

Speaker 3

Nothing unusual. I mean, Officer. Europe is probably more levered for export than NAFTA is for us. So it's not The proportionality of Europe for Europe is actually lower than it is for NAFTA, which proportionally is Very high. So there is a bit of a buffer there.

Speaker 3

So I mentioned before with MOG having its single biggest order, The European company that's shipping into Greater Asia, and that business remains strong. Look, it's hard to tell right now. Officer. We don't see a lot of negativity. We don't see any cancellations of orders that we have in backlog in Europe right now.

Speaker 3

Officer. When we talk to our customers and we talk to our employees of this isn't good and what's going to happen But right now, we don't see anything where things are rolling over. But Clearly, we are running scenarios, a variety of them. If Europe was to run into Some problems, what are we going to do? And like I had mentioned before, I think that we've got a playbook that allows us to protect operating margins under a variety of demand scenarios, and and we proved that in 2020.

Speaker 3

We would just run that same playbook back again. But I mean, I wish I could be more specific. Right now, everybody is Concerned on what's going on in the macro in Europe, but we don't see it rolling to a situation where it's overtly negative yet.

Speaker 8

That's great. Thanks, Rich.

Speaker 3

You're welcome.

Operator

Thank you. That concludes our question and answer period of Endover's 2nd Quarter 2022 Earnings Conference Call. You may now disconnect your line and have a wonderful day.

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