Dover Corp (DOV) Q4 2020 Earnings Call Transcript

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Dover Corp (DOV -0.53%)
Q4 2020 Earnings Call
Jan 28, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Dover's 4th quarter and fiscal year ending 2020 earnings conference call. Speakers today are Richard J. Tobin, President and Chief Executive Officer; Brad Cerepak, Senior Vice President and Chief Financial Officer; and Andre Galiuk, Vice President of Corporate Development and Investor Relations. After the speakers' remarks, there will be a question and answer period. [Operator Instructions] I would now like to turn the call over to Mr. Andre Galiuk, please go ahead, sir.

Andrey Galiuk -- Vice President-Corporate Development

Thank you, Nicole. Good morning everyone and thank you for joining our call. This call will be available for playback through February 18, and the audio portion of this call will be archived on our website for three months. Dover provides non-GAAP information, and reconciliations between GAAP and adjusted measures are included in our investor supplement and 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 to uncertainties and risks, including the impact of COVID-19 on the global economy and in 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 first, for the quarter and 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 and with that, I will turn this call over to Rich.

Richard J. Tobin -- President and Chief Executive Officer

Thanks. Andre, good morning everyone. Let's begin on Slide 3. Order trends remain positive across the majority of our portfolios in September, and we had a strong finish to the year. Our year-over-year backlog is up 21% as a result of general recovery trends across the portfolio, a meaningful increase in the DFRE segment backlog and some recognition from our customers that raw material costs and supply chain constraints are becoming more challenging into 2021 driving preorders in some markets. Revenue of 1.8 billion was flat versus the comparable period. Adjusted segment operating margin at 7.1% was flat despite unfavorable revenue mix during the quarter. For the full year, revenue was down 6% and adjusted segment margins up to 16.7% as a result of structural cost savings centered around strategic initiatives, tight cost controls, offsetting the impact of fixed cost under-absorption[Phonetic]. As we discussed at length in Q3, we are driving toward a strong cash flow performance in the 4th quarter, and we got it with full year free cash flow increasing 24% over 2019 achieving 14% of revenue. This is what we would expect to happen as we liquidate working capital in excess of loss profits impact and as a result of efficiency gains from our back office consolidation program. With that backdrop, we look into 2021 with conservative optimism. Our order book is solid, albeit with a different mix as compared to last year with DFRE having a material positive impact to the top and bottom line in '21. We are executing on many initiatives other than structural cost take out that are expected to deliver margin improvements, which I'll cover later in the presentation. With that, we are initiating full year guidance of 5% to 6% organic revenue growth and adjusted EPS of $6.25 to $6.45.

I will not spend a lot of time on slide 4, which is a more detailed overview of the results of the 4th quarter, so let's move to slide 5. Engineered Products revenue declined to lower shipments and CapEx levered markets such as industrial winches, waste handling equipment, and vehicle services. ESG had a tough Q4 comparable to overcome and VSG was coming off a strong Q3, so the performance was largely expected. Both have strong backlogs into 2021. The aerospace and defense business had a strong quarter that ended a record year for the business, and demand in industrial automation has shown robust recovery contributing to our backlog as global auto sequentially ramps production. In fueling solutions, as we discussed at the end of Q3, the comparable benchmark for Q4 was tough. Despite the topline pressure, the segment posted another quarter of strong margin performance and lower volume as our, as our productivity actions remain durable. We are beginning to see the mix benefits from our Helix and Anthem dispenser products which we believe are winning in the marketplace. We completed the acquisition of Innovation Control Systems in the 4th quarter, which is a great addition to our vehicle launch platform. ICS is a leading supplier of access, payment, and site management solutions and software, which fits into our strategy of driving long-term value from the large installed base of retail fuel sites which we presented in October. Sales and imaging and identification declined 3% organically. The core market in coating business grew on continued healthy demand for consumables and improvement in demand for printing equipment with particularly healthy activity in the United States. Digital textile printing CapEx remained slow, but it will begin seeing recovery in demand for consumables and small format machines which are likely [Technical Issue] of conditions normalizing in 2021. Imaging and identifications is our highest gross margin segment. The marking and coating business has delivered commendable margin performance this year, holding the profit line virtually unchanged; however, decrementals in textile printing on lower volumes weighed on the segment margins in Q4 and during the full year, we expect this to begin reversing progressively into 2021. Pumps and process solutions returned to top line growth in the 4th quarter on strong growth in biopharma, medical, and hygienic applications. We also began seeing cyclical recovery in industrial pumps, which posted growth after several soft quarters. Compression components and aftermarket continued to be slow, but recent trends in natural gas and LNG markets gives us grounds for optimism going forward. The 4th quarter closed off a solid margin performance in this segment with margins expanding a 150 basis points in Q4 and 220 basis points for the full year. This was driven by broad based productivity efforts, cost controls, favorable mix, and well-timed capacity expansion in biopharma and medical which we highlighted earlier in the year. Refrigeration and food equipment posted 13% organic growth with all businesses except food service equipment delivering the increase. A significant, a significant portion of the growth came from the well advertised strength in can making. We are also very encouraged by activity in core food retail market, which grew organic top line at high single-digits in the quarter driven by the continued strength in the door case product line where we saw double-digit growth for the full year. The heat exchanger business grew on robust demand in heat pumps and residential applications as well as refrigerated transport and industrial applications like semiconductors and data centers. Margin performance expectedly improved supported by volume and actions we took in the middle of 2020. Absolute earnings increased 71% in the quarter of the comparable period. This margin performance coupled with the upcoming ramp-up of automated case line in food retail positions us to deliver material margin expansion in 2021. I'll pass it to Brad here.

Brad M. Cerepak -- Senior Vice President and Chief Financial Officer

Thanks, Rich. Good morning, everyone. Let's go to slide 6. On the top is the revenue bridge. Our top line continued its recovery with sequential improvement in organic revenue over Q3. Several of our businesses including short cycle industrial pumps and heat exchangers returned to positive growth in the quarter. While biopharma, aerospace, and defense, marketing and coding, food retail, and can making continued their positive growth trajectory from prior quarters. FX benefited the topline by 2% or 34 million, driven principally by strengthening of the Euro against the Dollar. Acquisitions, more than offset[Phonetic] dispositions in the quarter by 12 million. We expect this number to grow in subsequent quarters. The revenue breakdown by geography reflects sequential improvement in each major geographies except with the exception of Asia. The US, our largest market, posted a 1% organic decline in the quarter, an improvement over the 4% decline in Q3 and progressively improving order rates and a strong quarter in biopharma, marking and coding, food retail, and can making among others. Europe declined 3% organically driven by retail fueling and a difficult comparable quarter in vehicle services, though partially offset by continued strength in several of our pumps and process solutions businesses. All of Asia was down 11% organically driven principally by China, which was down 16% organically. This result in China was not unexpected, as we continue to face headwinds in retail fueling due to the expiration of the underground equipment replacement mandate.

Moving to the bottom of the page. Bookings were up 2% organically, reflecting the continued momentum we see across our businesses. In the quarter, we saw organic growth in four out of our five segments. The fifth segment fueling solutions faced a difficult comparable quarter in the prior year as previously discussed. Overall, our backlog is currently up approximately 300 million or 21% higher compared to this time last year, positioning us well as we enter 2021.

Let's go to the earnings bridges on slide 7. We delivered improved sequential results in the quarter after a significant decline in Q2 and recovery in Q3. On the top chart, adjusted segment EBIT and margin were both essentially flat year-over-year as continued productivity initiatives offset negative organic growth and diluted impact of FX on margins. Going to the bottom chart, the adjusted net earnings declined 1 million, as higher taxes in corporate expense offset improved segment EBIT. The effective tax rate excluding discrete tax benefit was approximately 21.4% for the year compared to 21.5% in the prior year. Discrete tax benefits were 8 million in the quarter and 22 million for the year or approximately 4 million lower than in 20 -- than in 2019. As we move into 2021, excluding the impact of discrete taxes, we expect the effective tax rate remain essentially the same as 2020 at about 21.5% rightsizing and other costs were 21 million in the quarter or 17 million after tax relating to several new permanent cost containment initiatives and other items that we executed at the end of 2020.

Now on slide 8. We are pleased with the cash performance in 2020 with full year free cash flow of 939 million, a 181 million or 24% increase over last year. Free cash flow conversion stands at 21% of revenue for the 4th quarter, historically our highest cash flow quarter and 14% for the full year, a significant increase over the prior year. Recall, last quarters -- last quarter's earnings call, we decided to prioritize prudent working capital management over fixed course -- fixed cost absorption to close out the year, and you can see the value delivered in our year-over-year working capital comparison. We have strong revenue visibility into Q1 and confidence in our team's ability to match industrial production with improved customer demand. With that, I'll turn it back to Rich.

Richard J. Tobin -- President and Chief Executive Officer

Okay. Thanks, Brad. I'm on page 9. Let me take a few moments to give you an update on our center led initiatives that we outlined in our strategic plan in September of 2019. While we could have not expected what transpired in 2020, we positive at the time that our portfolio had through cycle durability and that there were opportunities to drive synergies from our diverse portfolio to improve profitability over time. Despite this, we often hear a notion that Dover is a cost out story likely because we give measurable structural cost saving goals each year, implying a finite nature to such endeavor. There is a lot more than cost reductions to our improvement journey, and we continue to reinvest a portion of the savings. So, I will give you a short update on where we are in these strategic initiatives. Through in 2019, we began with the right sizing of our SG&A base after a significant portfolio change. This was necessary and required immediate intervention. Since then, the improvements have been driven by steady productivity and structural cost actions by our operating units and from our investments in four core enterprise capabilities that generate very attractive return on investment and can be leveraged across the portfolio. The investments are substantial. By the end of this coming year., the head count involved a center led enterprise capabilities will have increased by over 50%. These are transformational initiatives touching every corner of our global portfolio and delivering real results that you can see in our bottom line, and there is significant runway to drive value. We are investing in the following four enterprise capabilities, and I'll highlight a few results, but I would encourage you to review the stats in the slides. First, Dover Digital on slide 10. This work began in 2017 and accelerated in 2018 with the opening of our Dover Digital Center in Boston. We have over 100 e-commerce connected product and software experts dedicated to this endeavor. This team helps our business to lever each commerce at scale and improve the customer journey with ease of doing business as well as back end efficiency for sales and order entry. For example, this year we target to reach a run rate of $1 billion of revenue processed through digital channels, much of which is service parts and catalog items compared to 100 million in 2019. This team also helps our business connect their products and enhance their offerings, which we will progressively highlight in future presentations, as we did for fueling solutions recently. This is a multi-year journey, value creation journey, and we are very excited about what lies ahead for our digital team.

Moving to slide 11. Our operation center of excellence is a central team of domain knowledge experts that delivers health and safety, supply chain management, lean operations, and advanced manufacturing and automation. This team is instrumental in driving value through rooftop consolidation and automation projects. As you know, we have a number of these in the works. We are also excited about the results of the early lean initiatives this spearheading. This is another multi-year journey that we continue -- will continue to deliver results. Moving on to slide 12 is our central back office system, which we call Dover Business Services. We've been at this for several years, and we're still in the early innings of expanding the scale and scope of this capability. By centralizing and offshoring transactional back office facilities, we multiply efficiency through scale, technology leverage, and unit cost arbitrage. DBS is and will remain an integral part of our margin enhancement story. And lastly moving to slide 3, the India Innovation Center is more than 600 person strong team that our operating companies can leverage for product engineering, digital solutions development, data information management, research and development, and intellectual property services. The scale and expertise of this team allows our operating companies to tap resources that would have been unaffordable to them as stand-alone companies and allows for concurrent engineering on time sensitive projects.

So, let's sum this up on slide 14. We laid out four pillars of our strategy in 2019 and have been delivering through cycle. We have maintained our focus on margin improvement and continue to invest despite the economic difficulties of 2020. Our end market exposure, coupled with the strategic R&D investments, we are delivering attractive growth profile. We are committed to reinvesting in our businesses as a top priority and capital allocation to maintain competitive competitiveness, fuel growth, and improve productivity. We are making good strides on the inorganic front. Finally, we're staying disciplined in our capital allocation by returning excess capital to our shareholders, buying[Phonetic] growing dividends and share repurchases. Moving to 15, where does this leave this going into 2021. We believe that our playbook offers us a significant runway to continue delivering attractive through cycle returns through mid single-digit topline growth, steady margin expansion, healthy cash conversion, and disciplined capital allocation and shareholder-friendly capital return posture.

Okay. I'll step off the soapbox and let's move on to 16, we expect demand in engineered products to rebound in 2021. We have seen strong bookings recently in vehicle services and Industrial automation with relevant automotive and vehicle usage statistics trending in the right direction. Bookings have also improved recently waste handling, and we are nearly fully booked for the first quarter. Municipal demand remains uncertain, but we see strong trends in the parts and digital business. As we previewed in November, we expect fueling solutions to have a modest organic growth year, there is known headwind from EMV roll-off in the US, but there are a number of positive [Technical Issue]. We are encouraged by the prospects of our new Anthem user interface solution offering. We expect robust growth in our systems and software business where we will be launching the industry first cloud platform developed. We also see good setup for vehicle wash and are excited about having ICS in our portfolio. We expect imaging and identification to perform well this year. Marking and coding saw limited downside in 2020, and we've been on a good trajectory in recent quarters, despite the tough comp in Q1 due to COVID-driven consumable stocking. We expect further improvement in services as travel restrictions subside and activity and serialization software is also firming up. The biggest factor in the segment is of course the digital textile printing unit. Our initial read is for the recovery to take place in the second half of the year when printers will be ramping up production for 2020 apparel collections. Pumps and process solutions expected to have another solid year. We expect robust growth in biopharma and hygienic applications and a continued recovery trend in industrial pump. Plastics and polymers is expected to deliver steady performance with a comparable basis to the second half bias to the second half. Precision components is likely to experience a slower start to the year, and we are still comping versus last year's first quarter. That's our robust upstream and downstream activity. And finally, we expect a very strong year in refrigeration and food equipment. The core food retail business is operating with a strong backlog, and the order trajectory has been healthy in the last few quarters. We expect retailers that had paused their remodel programs last year amid the pandemic to restart these strategic initiatives, and we are well positioned to participate in that activity. Additionally, we see a good outlook for natural refrigerant systems, both in Europe and also in the US where California was the first state to recently mandate transition to natural refrigerant systems. We were the pioneers in this space, and we are very well positioned to capitalize on this sustainability trends in the industry. Belvac as you know, is working through a record backlog and is booked for the year. Our heat exchanger business also exited 2020 with a record backlog and a constructive order trajectory across multiple verticals. This will result in material margin improvement in this segment on the back of the case production automation project, higher volume positive business mix. We covered most of the items on the earlier slides but summarize, but I summarize them here in the slide for your reference. As usual for a wrap up, I'd like to thank everyone at Dover for their work and continued perseverance during this last year. The Dover team has delivered strong results in it's difficult conditions, and I commend all of our employees for doing their part and Andre with that, let's move on to Q&A.

Questions and Answers:

Andrey Galiuk -- Vice President-Corporate Development

Nicole.

Operator

[Operator Instructions] One moment for our first question. The first question will come from the line of Jeff Sprague with Vertical Research.

Jeff Sprague -- Vertical Research -- Analyst

Thank you. Good day, everyone. A lot of good additional information there, but just let me dig into like a couple of things if I could, Rich, first interesting what you said about the kind of pre-ordering, are you able to fully protect yourself with price and hedging and other things on that type of activity that you're seeing from your customers?

Richard J. Tobin -- President and Chief Executive Officer

Yeah look, Jeff. I mean, I think we've got a couple of challenges going to Q1. Raw material prices are moving up, and there is a lot of constraints in logistics, right now. I think that it's been going on somewhat through the 4th quarter, and it looks to be getting tighter going into the first quarter as economic activity moves up. So, the bad news is, we're going have to deal with those constraints, and we're going to have to be on the front foot in terms of offsetting raw mats in terms of whether it's either pricing or productivity. But I think the, my comment about the backlog, it is influencing the demand in the backlog, because I think that there is beginning a recognition out there of I've got to get my orders in because of these constraints. I mean it's. Look at what's going on in auto. Just as a precursor to that. So, I don't think it's bad in a way, and I don't think it's negative for us in terms of people placing orders in advance of raw material cost, because I think that we've got some levers to pull there, and it's really short cycle at the end of the day. The good news is I think to the extent that our backlogs go up. From an S&OP process, we can plan more appropriately and that drives efficiency at the factory level floor. So, probably going to be a little bit of an interest in Q1, but I think overall it's not insurmountable.

Jeff Sprague -- Vertical Research -- Analyst

Great. And then just shifting to DFRE. So, it looks like you have the volumes here the fully kind of exercise the automation project. I suppose you don't want to get into margins by segments here, but can you give us a little color on how the, how the margins should play out in that business and is there any kind of, other than kind of the normal seasonal peak that we'll be looking at, any other just kind of noise or movement in the margin trajectory there?

Richard J. Tobin -- President and Chief Executive Officer

No, I would expect that the margins to comp well every quarter, but the seasonality of those margins to remain intact.

Jeff Sprague -- Vertical Research -- Analyst

Great, thanks.

Operator

The next question comes from the line of Steve Tusa with JPMorgan.

Steve Tusa -- JPMorgan -- Analyst

Hey guys, good morning.

Brad M. Cerepak -- Senior Vice President and Chief Financial Officer

Good morning, Steve.

Steve Tusa -- JPMorgan -- Analyst

I think with those, with the lots of buzzwords, Rich, not you you kind of like talking at that high of a level about corporate strategy. But I think the message is that there is something like a little bit more sustainable than just like a couple of years of cost cuts and noticeable to me was the 25% to 30% incremental margin guide and then the 11% to 13% of revenue and free cash flow in a year where you'll be growing pretty strongly. So basically, you should see some headwind, it shouldn't be like a great cash year, for example. I think back in 2019 in the fall, you said 25% to 30% incrementals and 8% to 12% free cash as a percentage of sales. Are these kind of like sustainable step-ups that you'd hope to deliver over time as part of the earnings and cash algorithm?

Richard J. Tobin -- President and Chief Executive Officer

Yeah. Look, at the end of the day, we expect to be pulling on both levers, consistent margin expansion and cash flow productivity, so productivity in the working capital line. Bottom line is, as we've been saying all year, we would expect with the headwinds that we would be liquidating our balance sheet as we should in a difficult environment. On the revenue side, we will have a working capital build because we've got a pretty robust revenue forecast going into '21, but do I think it's going to make our metrics worse? Not demonstrably so because I think that we're going to get the benefit of the margin expansion, and I don't expect to deteriorate at all in terms of working capital as a percent of sales.

Steve Tusa -- JPMorgan -- Analyst

And I would guess it. I mean when I look at that 11% to 13% of revenues. I mean it's not like your CapEx is actually above what I would expect it to be. I mean, is the 175 to 200 now a sustainable run rate or is that something that you pushed some projects out of '20 into '21 because I think you guys were planning on that coming down a bit, but there were some temporary projects, what's the outlook for CapEx for the next couple of years?

Richard J. Tobin -- President and Chief Executive Officer

Yeah, I mean we've got two new transformational projects under way, one in vehicle services group and one in ESG, which at the end of the day, they are not, they are not nearly the same scale of the new building that we did at CPC, and what we did at DFR, but it's the same logic. I mean it's automating what were pretty manual processes. So, I think that we're going to get a relatively quick payback in terms of the margin expansion there. It's early in the year. I think that we've tended always forecast a higher CapEx number that's actually gets delivered. That number looks reasonable considering we've got two bigger projects. But in the, so I don't want to, I don't want to take the number down right now or say it's an anomaly, but experience would say that it's probably a little bit high.

Steve Tusa -- JPMorgan -- Analyst

Right. But I mean if you do 11% to 13% of revenue. Even with that, it's not that bad. Just one quick one, you guys have talked about I think 25 million bucks of temporary cost reversals as a headwind into '21. Can you just give us an update on that number. If there is anything that's coming back relative to what you did last year to protect the margins?

Richard J. Tobin -- President and Chief Executive Officer

I mean there is nothing and look at the end of the day, we'll be building, we've got estimates and building it back some incentive comp and a variety of other things, but, but look it's all built into the EPS forecast that we have there. Whatever the pull back of of kind of, let me split. Let me answer it this way. Right. We had, we had coverage on furloughs, OK. So that was a positive this year because it deferred the cost of us having to take, to take those people out to a certain extent. What we're going to bring back is going to be absorbed into industrial production in the revenue line. So net net that's, that's an indifferent. So, what we're talking about is general SG&A, I mean the bigger movements there were T&E and incentive comp, so let's think positive for a moment, the incentive comp comes back, I think T&E is going to come back, but is it going to reach 2019 levels? No.

Steve Tusa -- JPMorgan -- Analyst

Right. Okay, great, thanks a lot.

Brad M. Cerepak -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

Our next question comes from the line of Andrew Kaplowitz with Citigroup.

Andrew Kaplowitz -- Citi Group -- Analyst

Hey, good morning guys.

Brad M. Cerepak -- Senior Vice President and Chief Financial Officer

Good morning.

Richard J. Tobin -- President and Chief Executive Officer

Hi.

Andrew Kaplowitz -- Citi Group -- Analyst

Rich, would you understand that we don't want to get too far ahead of ourselves in RNFE[Phonetic]. With the backlog that you have and the core food retail business picking up as well as the doValue[Phonetic] deliveries ramping up, would you actually say that the high-single digit forecast for '21, it could even be conservative given the double-digit momentum you saw in Q4?

Richard J. Tobin -- President and Chief Executive Officer

We are a little bit early to be..

Andrew Kaplowitz -- Citi Group -- Analyst

I said we don't want to get ahead of ourselves.

Richard J. Tobin -- President and Chief Executive Officer

Yeah. Let's get ahead of ourselves, while we're not going to results. Look, you know what, I think that the backlog is a good precursor for delivering the incremental margins that we're looking for from a segment point of view, our expectation. It's the highest growth segment in our forecast right now, and I have to go back to look because it's a margin differential, but it's a material contributor to the EPS expansion. So, to the extent the trend continues, because this is a relatively short cycle business, if I just talking about refrigeration, now, not Belvac. Belvac is booked for the year. So, if we get more orders for Belvac, that just gets pushed into 2022 quite frankly. So, DFR which is generally a short cycle business, we're covered for Q1 and beginning to get it to coverage into Q2. Let's get Q1 under our belt before we start moving the number up, but it's a lot of the total profit changed that we have baked into the EPS is coming from that segment by the way. And the reason one, you could say, well it's not overly aggressive in terms of the conversion rate. Remember, that's one of our lower margin businesses, so that's going to bring down the consolidated conversion a little bit, but we'll take it in terms of absolute profits.

Andrew Kaplowitz -- Citi Group -- Analyst

Very helpful. And then, Rich, just in engineered products. Can you just give us a little more color into what happened in the quarter in Q4? I know you said it was just basically expected sales decline, did you see any inflationary pressure in that segment in the quarter and how you are thinking about the margin in that segment in '21?

Richard J. Tobin -- President and Chief Executive Officer

It's not inflation, I mean I think that if you go back in Q3, we, the guys did a fantastic job in VSG of delivering off a backlog that it built during the quarter. So, the production performance there was very, very good. And it actually aid into Q4 from a comparable point of view. So, that's not a problem there and ESG, I mean, the weak part of the market, which we've been talking about all year is municipal and generally speaking, municipal tends to get delivered at the end of the year. So, we knew that they had a bad comp. Having said that, look at the end of the day, those are easy and that segment is more of our industrial businesses, so that's where the raw mat headwinds are. And look, we're going to have to work that out between volume price and productivity. But I think we fully expect portfoliowide to offset all raw material headwinds.

Andrew Kaplowitz -- Citi Group -- Analyst

Thanks, Rich. Appreciate it. Thanks.

Operator

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

John Inch -- Gordon Haskett -- Analyst

Thank you. Good morning, everyone. Good morning Rich and Brad and Andre. If the economy were to, Rich, really pick up starting say in the second half as was presumed, the vaccine rollout is successful. Are you geared to handle what could be a material upsurge in demand or would you have to, like would you have to kind of come up with a plan to sort of debottleneck or expand capacity or about 2 people back[Phonetic], like how would that, how would that work?

Richard J. Tobin -- President and Chief Executive Officer

The only area that we've got real capacity constraint would be in a niche business like Belvac. The balance of the portfolio does not run on even five-day three-shift operation. Quite frankly, for the most part, we're six-day a week single shift group here. So, to the extent that we have some amount of visibility and to the extent that as economic activity ramps that the supply chain keeps up with it, which it isn't right now, I don't think that we are capacity constrained in any meaningful way. But having said that, I mean in terms of top line growth, I think that we are expecting economic activity to kind of sequentially ramp through '21 even in our forecast, but are we capacity constrained outside of some of our nicher businesses? No.

John Inch -- Gordon Haskett -- Analyst

That's fair. You just mentioned supply chain, by the way. Are you at a point where you're trying to circumvent this or are you letting it right to see how it happens? Meaning, I don't know, possibly seek other suppliers, dual sourcing that sort of thing or is it still sort of too early to tell?

Richard J. Tobin -- President and Chief Executive Officer

No, no, no, no. We're doing everything under our power to get beyond this because whether that is buying raw materials forward, because into the increasing curve on on plate steel or sheet metal or something like that, which we're doing. We've given guidance to all of our operating companies that from a working capital perspective if they need to build at the beginning of the year and bleed it off in the second half of the year, we take the production performance and the efficiency of that rather than getting into stop-start kind of scenario. And then there are certain, a lot of the pinch points, forget kind of logistics with container freight and everything else, some of the pinch points on electronic components. We're fighting it out with everybody else.

John Inch -- Gordon Haskett -- Analyst

Okay. No, that makes sense. Maybe just maybe just lastly here. I'm actually really triggered by the attention you put toward India business services and so forth and deliberately so, if Dover were a substantially larger company would efficiencies in the initiatives like the Dover Business Services exponentially compound? I mean, you've got a huge company. Right. So if you are all the sudden to do M&A and become a lot larger would sort of those benefits accrue at a compounded basis or prospectively at a linear basis, it's almost like in these things that you're creating serve to create for mechanisms to justify why Dover should actually continue to expand into adjacencies to create shareholder value?

Richard J. Tobin -- President and Chief Executive Officer

Well, a reason that we're doing, it is, as we've said all along and that Dover's reason to exist is to bring services that scale, that are kind of our smaller companies would not be able to do on the road. Having said that, as we build, as we build those services, we're not even beginning to scratch the surface of the leverage that we get. Because the fact of the matter is despite the robust trend in growth that we have, we're continuing to reinvest at a certain point you've built enough scale that bringing on another 100,000 transactions doesn't require you to build out anything more, so you flip over in terms of the benefit of that leverage. Having said that, we have a variety of conversations around here about being a compounder and doing something on the inorganic side. This is clearly an asset for us to extract synergy value of anything that we were to buy.

John Inch -- Gordon Haskett -- Analyst

Makes sense. Thanks Rich. Appreciate it.

Richard J. Tobin -- President and Chief Executive Officer

Thanks.

Operator

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

Scott Davis -- Melius Research -- Analyst

Great. Good morning, guys.

Richard J. Tobin -- President and Chief Executive Officer

Scott.

Brad M. Cerepak -- Senior Vice President and Chief Financial Officer

Scott.

Scott Davis -- Melius Research -- Analyst

Rich, can you give us a little bit more color on retail fueling in China and just are we still decelerating, but we kind of add a new normal demand level?

Richard J. Tobin -- President and Chief Executive Officer

I think when we get feedback.

Scott Davis -- Melius Research -- Analyst

Can you hear me? [Speech Overlap] Okay.

Richard J. Tobin -- President and Chief Executive Officer

Okay, all right. Yes. That works. Thanks. Andre. I think this is the last bad comp for us which was on the Double Wall issue. But having said that, the volume that we see out of, primarily the NOCs in China has been pretty low. We don't, we had a big conversation around here the other day, whether that's because of, is the volume down and we're missing out on it or is the volume just down. We've gone out to all of our traditional customers in China. We still rate very well in terms of their purchasing programs. I just think that for whatever reason that 2020 was a down cycle in terms of kind of the big the NOC build out of their of the retail operations. Early to say whether that recovers. And that's not really built into our forecast for '21, but at some point, it's going to have to.

Scott Davis -- Melius Research -- Analyst

Okay, fair enough. And then just as a follow-up, I mean you talked a little about inventories. But it's hard to say, just given the diversity of your businesses, of course, but are inventories back to normal you would say at the customer level? If we've heard below trend line inventories for several quarters now. So, are we back to normal some double ordering?

Richard J. Tobin -- President and Chief Executive Officer

Unfortunately it's one of these, it depends, Scott answers. We have businesses like our industrial pumps business that sells through stocking distributors. Our early reads here in January is there is an amount of restocking going on because our backlogs in the industrial businesses there are building, the same thing with material handling those are those backlogs are building. So, I think it's fair to say that everybody was very prudent in terms of inventories on the distribution side in '20. Now, everybody is trying to make two calls. One is economic activity going to be in '21 and this second thing I mentioned of if there are going to be supply constraints as everybody ramp sequentially, do I got to get in the front foot and get my orders in, because there's a potential that some of those deliveries are going to be delayed, outside of the quarter. So there's really two of those phenomenons going on. Do I think that they are severely under stocked? No, but I think that by and large, our stocking distributors are going to stock based on what they think that the revenue is going to be and then which is built into our forecast.

Scott Davis -- Melius Research -- Analyst

Okay. Good luck, guys. Thank you.

Richard J. Tobin -- President and Chief Executive Officer

Thanks.

Brad M. Cerepak -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

The next question will come from the line of Julian Mitchell with Barclays. Hi, good morning. Maybe just a first question around any margin color by segment that you can give. I see the 25 to 35 guide firm, wide, and incremental margins, any segments to call out that being an extreme ends of that spectrum. And maybe just a final point in DFS, should we expect operating margins to grow this year or that might be a challenge, because of the EMV mix headwind?

Richard J. Tobin -- President and Chief Executive Officer

There is plurality in terms of incremental margin with the exception of Engineered Products, which will be slightly lower and so let's discuss why, right. The engineered products is going to be slightly lower just because of the gross margin within that, within that segment, and despite the fact that DRFE has lower gross margins at the segmental level, the revenue growth there is so high that you're getting a pretty big impact in terms of absorption benefit year-over-year. So now, having said that, we do have structural cost savings that are rolling through at the same time and that depends segment by segment, but I think that my comments here are, I think you've got your finger on it for DFS because relatively low growth environment and it is a little bit negative because of the mix, but we think that we can make that up in terms of productivity. So, then the hierarchy would be engineered products the lowest and then plurality again across the rest of the portfolio.

Julian Mitchell -- Barclays -- Analyst

Great, thank you and then see the full year guide across the firm, just wanted, perhaps, the first quarter and maybe just talk about orders and bookings in recent weeks and should we expect the first quarter to look maybe a little better than Q4 in terms of year-on-year revenue and margin, but not substantially different until Q2?

Richard J. Tobin -- President and Chief Executive Officer

I think the answer is yes, but that is a calculation that I have not done around here. I can just tell you that what you would expect is the toughest comp is Q1 to Q1, just because it's pre-pandemic to entering into '21, but we expect it to be better, vis-a-vis Q1. Clearly, Q2 comp is going to be a relatively low bar to hurdle and then the back end of the year is going to be as we mentioned during the color on the segments that we have certain businesses that we believe are back-end loaded, either because of seasonality or based on where they are in the recovery in those markets, so we expect to be better in Q1, everybody is going to be better in Q2, and then regular seasonality from there.

Julian Mitchell -- Barclays -- Analyst

Great, thank you.

Richard J. Tobin -- President and Chief Executive Officer

Thanks.

Operator

The next question will come from the line of Andrew Obin with Bank of America.

Andrew Obin -- Bank of America -- Analyst

Yes, good morning, Brad. Andre, good morning.

Brad M. Cerepak -- Senior Vice President and Chief Financial Officer

Good morning.

Andrew Obin -- Bank of America -- Analyst

Just a question, you're definitely sort of starting to final cylinders when it comes to operational storage starting to deliver consistently on the operational algorithm, but can we just talk about how is your strategy on capital allocation and specifically M&A is evolving going forward and what kind of opportunities should we be thinking for 2021 and what's out there in terms of availability?

Richard J. Tobin -- President and Chief Executive Officer

I think that the hierarchy we've been over a variety different times. So that's unchanged. I think in terms of opportunity, there is plenty out there and a lot of it's very expensive for all the reasons that we've, that we've talked about. We are on the front foot, actually spent more if you go, I don't know what the slide number was, we spent more in '20 versus '19.

Andrew Obin -- Bank of America -- Analyst

That is actually right.

Richard J. Tobin -- President and Chief Executive Officer

Yeah. We tried to spend a lot more than that. Yeah. Frankly thought couldn't get it done because of valuation or a variety of different things. So, look, I'm very confident in as you, as you described at the operational algorithm here, I think that this is just a roll forward of what we've done for the last couple of years. So, our confidence of converting revenue into incremental margin is quite high. I think that we have a lot of businesses that have earned the right to grow inorganically. We just got to find the targets and execute on them without getting crazy.

Andrew Obin -- Bank of America -- Analyst

Got you. And just a follow-up, I think John has asked you about the supply chain. But how has your thinking about the supply chain has evolved throughout the COVID sort of pandemic, you managed it very well, but anything different if you guys are going to do going forward in terms of where you sourcing and I know that sort of extension of question, but maybe more color?

Richard J. Tobin -- President and Chief Executive Officer

Look, I mean, we're not, our supply chains are relatively discrete. So, any moves that we make are, we're not auto OEMs that have to make big strategic decisions based on geopolitics and foreign currency and things like that. So we're changing it all the time to a certain extent. I think that the, the trade of buying low-value, high commodity price exposure, basic metal working out of Asia and bringing back to the US, I think that that has been dying for a couple of years now. It's part and parcel of the reason that we're making some investments into VSG and ESG, right now, because we think that we can be more competitive and get the industrial absorption of doing it ourselves to a certain extent, but we're not, we're not making big strategic decisions and not big swings. But we're always trying to adapt the supply chain.

Andrew Obin -- Bank of America -- Analyst

Thank you very much.

Richard J. Tobin -- President and Chief Executive Officer

Welcome.

Operator

The next question comes from the line of Joe Ritchie with Goldman Sachs. Thanks, good morning guys.

Brad M. Cerepak -- Senior Vice President and Chief Financial Officer

Morning.

Richard J. Tobin -- President and Chief Executive Officer

Good morning.

Joe Ritchie -- Goldman Sachs -- Analyst

Hey, Rich, maybe following on that last question, your comments around being front footed on M&A, maybe just the flip side of that argument is it like given where evaluation levels are right now, you could argue, maybe there hasn't been a better time to look at your portfolio closer in terms of, I'm maybe unlocking value on assets that you don't expect to be part of the portfolio longer term, so maybe just some thoughts on that and how you're thinking about that specifically for 2021?

Richard J. Tobin -- President and Chief Executive Officer

Joe, it's not, it's not changed. I mean, we're constantly revisiting a variety of pieces of the portfolio. I mean, that's really all I can say about it at the end of the day, right. We may have views on individual pieces, but we don't want that to get in the way of us extracting the maximum value that we can out of the pieces that we have, so it's spent a lot of time here in terms of portfolio construction on both and more on the end and than then the out but but we screen all of our businesses for their participation strategy and changes in the marketplace and everything else, not so much, hey wait a minute, everybody is paying a lot for things, so maybe we should go to market. We look at it more, is in terms of its hierarchy, in terms of return on invested capital in the group, and whether they are advantaged or disadvantaged structurally over the next time horizon.

Joe Ritchie -- Goldman Sachs -- Analyst

Yeah let me that makes sense, [Technical Issue] a perfect segue, but I did not want to talk about food retail to some degree. You talked last quarter about the fact that margins have gotten back to the low-teens. Your remodeling had restarted, I guess, how do we think the comments around like backlog and whether that backlog is building because it's been potentially more difficult to continue on the remodeling at this point given the coronavirus cases surging, I just want to get a better understanding for whether you're getting on premise access and then secondly, how the margins have kind of even trended even beyond that the 3rd quarter for the food retail business.

Richard J. Tobin -- President and Chief Executive Officer

Yeah, I mean we're expecting big things from the retail food business this year for sure. A lot of the deferments that happened because of COVID access and a variety of other forces are clearly what's building the backlog into '21. But having said that, we've gone through 4.5, close to 5-year cycle where there hasn't been even we would argue replacement or maintenance spending in terms of global food retail. So, there is some pent-up demand there. We think that we have a more competitive product now. We're changing the cost structure of that product. And as we talked about before, our view is that what the customers really value in this business is being able to have the product available when they want it, and to the extent that now we've changed our changing the dynamic of our lead times. I think that's beginning to be reflected in our backlog. So this is spent, the management team of this business has spent 2.5 years working real hard to transform this business and and our expectations in terms of profitability this year is material in terms of what's baked into our EPS.

Joe Ritchie -- Goldman Sachs -- Analyst

Well, yeah. Congrats on that will be nice to see. Thanks, guys.

Richard J. Tobin -- President and Chief Executive Officer

Thanks.

Operator

The next question will come from the line of Nigel Coe with Wolfe Research.

Nigel Coe -- Wolfe Research -- Analyst

Thanks and good morning everyone. We cut a lot of ground already. So, I just want to talk about the sort of the framework FY20 made out and what struck me, was your revenue growth range of 5 to 6 is quite tight and imply good visibility, maybe some conservatism. That's my first sort of par question and the second is, your range for margin 25 to 35 is quite a bit wider than we normally see. So we normally see bit more precision on margins and that's revenues in your vice versa. So I wonder if you could maybe comment on that and the breadth of the margin range, is that a function of portfolio mix primarily or is there just some of our materials, any color of that would be helpful?

Richard J. Tobin -- President and Chief Executive Officer

Yeah Nigel. I mean, look, I would expect that we are going to tighten both those ranges progressively as we go through the year. But I mean, you've got your finger on it. I mean we're predicting even, even if we go to the organic revenue, which doesn't have FX, the margin does have FX and that's we're predicting FX in advance of 12 months and we're predicting mix over a wide diverse portfolio in terms of gross margin, so we need to give ourselves a little bit latitude there. As I mentioned in a previous question before, the good news is that refrigeration is coming back. And in terms of absolute profits, it is going to be material to the bottom line. That's not really great in terms of consolidated conversion margin just because of the, of the EBIT margin of that particular business. So if you go back to the question, I think that was just asked before, what could that revenue be higher, or are we in an inflection point, because there is really going to be and we're under forecasting refrigeration for the year. Why I hope we are what that's going to do is push up the top line, but it's going to draw down the conversion margin. But you know it will take the absolute profit. So it's our best guess right now. I guess at the beginning of the year, we'd like to give us some latitude. I think that the history around here has been to try to hit the top and we've got every intention of trying to do so.

Nigel Coe -- Wolfe Research -- Analyst

Thanks, Rich. And then my follow-on is really the coming around the pre-buying perhaps pre-ordering because of supply chain constraints, which makes total sense. And we, we're certainly hearing about supply chain constraints. But are you getting the feedback from customers? Is that your gut instinct telling you that this is happening and therefore should we expect that to be maybe a moderation in order rates in 1Q sort of as a consequence of our 4 key dynamic?

Richard J. Tobin -- President and Chief Executive Officer

It is my gut feeling, we have a president operating company presidents meeting as soon as we finish up with your question. And that's the one of the things that we're digging into, but based on what we're seeing in our own operations and the guidance that we're giving our own operations of if you're seeing constraints out there, you better get on the front foot and start buying components to the detriment of working capital, which we know we can bleed off of the balance of the year. Let's not miss out on deliveries and production performance. So, if we are doing it and my expectation is that everybody is doing it. Do I think it's, to the detriment of order rates through the balance of the year? No I don't, because I think what's baked look. There's always going to be volatility quarter by quarter. But what's baked into our revenue forecast is shipments for lack of better word, if there is some amount of it and look at the end of the day, you get a backlog that's in excess of your first quarter production probably not going to get it out, anyway. So the good news. I think when I answered Sprague before is, you know what the blogger, the bigger the backlog that we have, the more efficiently we should be able to run our factories and that's margin accretive.

Nigel Coe -- Wolfe Research -- Analyst

Right, thanks Rich, very helpful.

Richard J. Tobin -- President and Chief Executive Officer

Thanks.

Operator

Last question will come from the line of [Indecipherable] RBC Capital Markets.

Unidentified Participant

Thank you. Good morning, everyone.

Brad M. Cerepak -- Senior Vice President and Chief Financial Officer

Good morning.

Richard J. Tobin -- President and Chief Executive Officer

Good morning.

Unidentified Participant

Hey, it would be interested in hearing what the dynamics are around that natural refrigerant, Rich, that you called out. Can your equipment be used for that as had to be retrofit and how do you think this trend develops from here?

Richard J. Tobin -- President and Chief Executive Officer

Well, we did a press release on it not too long ago. So you can see our view based on what the ruling for California was. We are a leader in the systems business in Europe, and Europe is probably three to five years ahead of the United States. So, we have the technology. It's now going to be a question of what the adoption rates and where they are regulatory mandated or to individual retail operations want to as part of ESG go green and begin adapting those solutions. So we feel really good about our position in terms of having the technology ready readily available.

Unidentified Participant

Got it. And then just a second question, unrelated, if the new administration as part of the stimulus program puts through some restrictions about buy American American products, how is Dover positioned just broadly if that restrictions comes through?

Richard J. Tobin -- President and Chief Executive Officer

I don't, I don't think it would be materially beneficial. Generally speaking, we make and ship in the jurisdiction that we operate in, as an overall comment.

Unidentified Participant

Could you be flexible in terms of your supply chain in terms of doing some sub-assemblies in the US to qualify. Just the last time this went through. That's what we saw companies here.

Richard J. Tobin -- President and Chief Executive Officer

Yeah I'm side yeah, I think that if we were a big vertically integrated operation. Yeah, I think that there would be a more of a challenge. We don't we don't bring in assembled product of any grand scale that you break apart in containers and then put value add. I mean I've been through this previous life. Yeah. I look at the end of the day, I don't, I don't think it's going to move the needle for us. The only thing that comes to mind is that if we were a component part and somebody wants to source in the United States and I had been sourcing had been importing it. Is that an opportunity? I guess sure. I wouldn't have any idea how to scale it right now though.

Unidentified Participant

That's fair. Thank you very much.

Richard J. Tobin -- President and Chief Executive Officer

Thanks.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Andrey Galiuk -- Vice President-Corporate Development

Richard J. Tobin -- President and Chief Executive Officer

Brad M. Cerepak -- Senior Vice President and Chief Financial Officer

Jeff Sprague -- Vertical Research -- Analyst

Steve Tusa -- JPMorgan -- Analyst

Andrew Kaplowitz -- Citi Group -- Analyst

John Inch -- Gordon Haskett -- Analyst

Scott Davis -- Melius Research -- Analyst

Julian Mitchell -- Barclays -- Analyst

Andrew Obin -- Bank of America -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Unidentified Participant

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