Dover Corporation
Q4 2020 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Good morning, and welcome to Dover's Fourth Quarter 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 Andrey Galiuk, Vice President of Corporate Development and Investor Relations. . As a reminder, ladies and gentlemen, this conference call is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Andrey Galiuk. Please go ahead, sir.

[Andrey Galiuk:]

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 3 months. Dollar 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 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 Tobin:]

Thanks, Andrey. Good morning, everyone. Let's begin on Slide 3. Order trends have remained positive across the majority of our portfolio since 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 CFRE 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 at $1.8 billion was flat versus the comparable period. Adjusted segment operating margin at 17.1% was flat despite unfavorable revenue mix during the quarter. For the full year, revenue was down 6% and adjusted segment margin up to 16.7% as a result of structural cost savings, center-led strategic initiatives, tight cost controls offsetting the impact of fixed costs under absorption. As we discussed at length in Q3, we are driving towards a strong cash flow performance in the fourth 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 lost 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 takeout that are expected to deliver margin improvements, which I'll cover later in the presentation.

[Brad Cerepak:]

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 exchanges, 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 top line by 2% or $34 million, driven principally by a strengthening of the euro against the dollar. Acquisitions more than offset dispositions in the quarter by $12 million. We expect this number to grow in subsequent quarters. Revenue breakdown by geography reflects sequential improvement in each major geography, except -- with the exception of Asia. The U.S., our largest market, posted a 1% organic decline in the quarter, an improvement over the 4% decline in Q3 on progressively improving order rates and a strong quarter in biopharma, marking 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 & Process Solutions businesses.

[Richard Tobin:]

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 but transpired in 2020, we posited 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's a lot more than cost reductions to our improvement journey, and we continue to reinvest a portion of the savings, so we'll give you a short update on where we are on these strategic initiatives. True in 2019, we began with the rightsizing 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 4 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 headcount involved that center-led enterprise capabilities will have increased by over 50%. These are transformational initiatives touching every quarter 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 4 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 accelerate 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 event. This team helps our business 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'll progressively highlight in future presentations as we did for fueling solutions recently.

[Operator:]

. The first question comes from the line of Jeffrey Sprague with Vertical Research.

[Jeffrey Sprague:]

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 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 Tobin:]

Yes. 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 constraint in logistics right now. I think that it's been going on somewhat through the fourth 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 to 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 that my comment about the backlog, it is influencing demand in the backlog because, I think, that there's 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 costs 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.

[Jeffrey Sprague:]

Right. And then just shifting to the DFRE. So it looks like you'll have the volumes here to 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 margin 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 kind of noise or movement in the margin trajectory there?

[Richard Tobin:]

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

[Operator:]

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

[Charles Tusa:]

I think with the lots of buzzwords, Rich, not used to you kind of like topping at that high level about corporate strategy. But I think the message is that there's something like a little bit more sustainable than just like a couple of years of cost cuts than noticeable to me was the 25% to 35% incremental margin guide. And then the 11% to 13% of revenue in free cash flow in a year where I'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 Tobin:]

Yes. Look, at the end of the day, we expect to be pulling on both levers, consistent margin expansion and cash flow productivity. So productivity and the working capital item. Bottom line is, as we've been saying all year, we would expect with the headwind that we'd 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.

[Charles Tusa:]

And I would guess -- I mean, 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 million to $200 million now a sustainable run rate? Or is that something that you push some projects out of '20 into '21? Because I think you guys are planning on that coming down a bit that there were some temporary projects. What's the outlook for CapEx for the next couple of years?

[Richard Tobin:]

Yes. I mean, we've got two new transformational projects underway, one in vehicle Services group, and one in ESG, which -- look, at the end of the day, they're 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 we're pretty manual processes. So we 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 to always forecast a higher CapEx number that actually gets delivered. That number looks reasonable considering we've got 2 bigger projects. But -- so 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.

[Charles Tusa:]

Right. But I mean, if you do 11% to 13% of revenue, even with that, it's not that bad. Just 1 quick one. You guys had talked about, I think, $25 million of temporary cost reversals as a headwind in can you just give us an update on that number, if there's anything that's coming back relative to what you did last year to protect the margins?

[Richard Tobin:]

There's nothing I look. At the end of the day, we'll be building. We've got estimates of building it back some incentive comp and a variety of other things. But look, it's all built into the EPS forecast that we have there. Whatever the pullback of kind of -- let me -- let me answer you this way, right? We had coverage on furloughs, okay? So that was a positive this year because it deferred the cost of us having 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 an indifference. So what we're talking about is general SG&A, And the bigger movements there were T&E and incentive comps. 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.

[Operator:]

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

[Andrew Kaplowitz:]

Rich, with the understanding that we don't want to get too far ahead of ourselves in R and FE with the backlog that you have in the core food retail business picking up as well as the bell back deliveries ramping up, would you actually say that high single-digit forecast for '21 could even be conservative given the double-digit momentum that you saw in Q4?

[Richard Tobin:]

It's a little bit early to...

[Andrew Kaplowitz:]

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

[Richard Tobin:]

Yes, let's get ahead of ourselves while we're not getting ourselves. 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'd 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 we get more orders for callback, it just gets pushed into 2022, frankly. So DFR, which is generally a short-cycle business, we're covered for Q1 and beginning to get 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 change that we have baked into the EPS is coming from that segment. By the way, and the reason when 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. We'll take it in terms of absolute profits.

[Andrew Kaplowitz:]

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

[Richard Tobin:]

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 had built during the quarter. So the production performance there was very, very good. And it actually add into Q4 from a comparable point of view. So that's not a problem there. And 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 know that they had a bad comp. Having said that, look, at the end of the day, those are -- that segment is more of our industrial businesses. So that's really 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, portfolio-wide, to offset all raw material headwinds.

[Operator:]

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

[John Inch:]

Chandra. If the economy were to rich really pick up starting, say, in the second half as let's present vaccine rollout is successful. Are you geared to handle what could be a material upsurge in demand? Or would you have to like we have to kind of come up with a plan to sort of debottleneck or expand capacity or bring a bunch of people back. How would that work?

[Richard Tobin:]

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 5-day, 3-shift operations, quite frankly, for the middle part, we're a 6-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 thing. 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 niche your businesses? No.

[John Inch:]

No, 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 wrong 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 Tobin:]

No, no. We're doing everything under our power to get beyond this because whether that is buying raw materials forward because into the increase in curve on plates deal or sheet metal or something like that, which we're doing. We've been giving 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 it to 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:]

Okay. No, that makes sense. Maybe -- maybe just lastly here. I'm actually really intrigued by the attention you put toward India, business services and so forth and deservedly so. If tower were a substantially larger company, would efficiencies in the initiatives like the Dover business services exponentially compound, I mean, you're not a huge company, right? So if you were, all of a sudden, to do M&A and become a lot larger, would sort of those benefits accrue as a compounded basis or prospectively at a linear basis? It's almost like can 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 Tobin:]

Well, look, the reason that we're doing it is, as we said all along that Dover's reason to exist is to bring services at scale that are kind of our smaller companies would not be able to do on their own. 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 and 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. Now 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.

[Operator:]

Appreciate it. Next question will come from the line of Scott Davis from Numis Research Research.

[Scott Davis:]

Scott, Rich, can you give us a little bit more color on retail fueling in China. And just are we still decelerating? Are we kind of at a new normal demand level?

[Richard Tobin:]

All right. Yes, that works. Thanks, Andre. I think this is the last bad comp for us. Which was on that double-wall issue. But having said that, the volume that we see out of, primarily, the NOx 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 the purchasing programs. I just think that, for whatever reason that 2020 was a down cycle in terms of kind of the NOC build-out of their 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:]

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, as we've heard below term line inventories for several quarters now, so was back to normal in on double ordering?

[Richard Tobin:]

Unfortunately, it's 1 of these. It depends, Scott answers. We have businesses like our industrial pumps business that sells through stocking distributors are early reads here in January is there's an amount of restocking going on because our backlogs and the industrial businesses there are building the same thing with material handling. Those backlogs are building. So I think it's fair to say that everybody is very prudent in terms of inventories on the distribution side. In '20, they -- now everybody is trying to make two calls. What is economic activity going to be in '21? And the second thing I mentioned of if there are going to be supply constraints as everybody ramps sequentially, do I got to get on 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're severely under stock? 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 -- which is built into our forecast.

[Operator:]

Next question comes from the line of Julian Mitchell with Barclays.

[Julian Mitchell:]

Maybe just a first question around any margin color by segment you can give. I see the $25 million to $35 million guide firm ahead of incremental margins. Any segments to call out being extreme ends of that spectrum? And maybe just to find a 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 Tobin:]

There is plurality in terms of incremental margin with the exception of Engineered products, which would be slightly lower. So let's discuss why, right? The Engineered products is going to be slightly lower just because of the gross margin 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 it's a relatively low growth environment, and it is a little bit negative because of the mix, but we think that we can make that up and do the product 3. So then the hierarchy would be Engineered products, the lowest and then the plurality, again, across the rest of the portfolio.

[Julian Mitchell:]

Great. Then see the full year guide across the firm. Just wondered perhaps the first quarter, 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 Tobin:]

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-à-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 of those markets. So we expect to be better in Q1, everybody is going to be better in Q2, and then regular seasonality from there.

[Operator:]

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

[Andrew Obin:]

Just a question. You're definitely sort of starting to find all cylinders when it comes to operational storage is starting to deliver consistently on the operational algorithm. But can you 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 well, how it in terms of availability?

[Richard Tobin:]

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

[Andrew Obin:]

That's exactly right.

[Richard Tobin:]

Right. Yes. We tried to spend a lot more than that, quite frankly, but couldn't get it done because of valuation or a variety of different things. So look, I'm very confident in, as you described it, 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 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:]

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 manage it very well, but anything different that you guys are going to do going forward in terms of where you're sourcing? And I know it's at extension of John's question, but maybe more color.

[Richard Tobin:]

Look, I mean, we're not -- our supply chains are relatively discrete. So any moves that we make are -- we're not auto OEM, and we have to make 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 trade of buying low-value, high commodity price exposure, basic metal working out of Asia and bringing back to the U.S., I think that, that has been dying for a couple of years now, 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 making big swings, but we're always trying to adapt the supply chain.

[Operator:]

Next question comes from the line of Joe Ritchie with Goldman Sachs.

[Joseph Ritchie:]

On maybe following on that last question, your comments around being front footed on M&A. Maybe just the flip side of that argument, given where valuation levels are right now, you could argue maybe there hasn't been a better time to looking at the portfolio closer in terms of 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 Tobin:]

Joe, it's not changed. I mean we're constantly revisiting a variety of pieces of the portfolio. And 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 I spent a lot of time here in terms of portfolio construction on both -- and more on the in and then the out. But we screen all of our businesses for their participation strategy and changes in the marketplace and everything else, not so much, "Hay, wait a minute, everybody is paying a lot for things." So maybe we should go to market. We look at it more as in terms of its hierarchy in terms of return on invested capital in the cup and whether they are advantaged or disadvantaged structurally over the next time horizon.

[Joseph Ritchie:]

Yes. That makes sense, and I don't mean this to be a perfect segue, but I did 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, remodeling had restored. I guess, how do we take 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 current coronavirus cases surging? 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 given being on the third quarter for the food retail business?

[Richard Tobin:]

Yes. 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 a 4.5- to 5-year cycle where there hasn't been even, we would argue, replacement or maintenance spending in terms of 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 -- are changing the dynamic of our lead times, I think that's beginning to be reflected in our backlog. So this is expense. The management team of this business has spent 2.5 years, working real hard to transform this business. And our expectations in terms of profitability this year is material in terms of what's baked into our EPS.

[Operator:]

Next question comes from the line of Nigel Coe with Wolfe Research.

[Nigel Coe:]

We have covered a lot of ground already. So I really want to talk about the sort of the frame of FY '21 you have layed out. And what struck me was your revenue growth range of 5% to 6% is quite tight and it implies good visibility, maybe some considers them. That's a good sort of a question. And the second is your range for margins, 25% to 35%, is quite a bit wide than we normally see. So we normally see more precision on margins and that's revenues in your vice versa. So I wonder if you could maybe point on that. And the width of the margin range, is that a function of portfolio mix primarily? Or is there just some insertion the raw material? Any color there would be helpful?

[Richard Tobin:]

Yes. Nigel. I mean, look, I would expect that we are going to tighten both those changes progressively as we go through the year. But I mean, you've got your finger on it. I mean, we're predicting even if we go to the organic revenue, which doesn't have that mix, the margin does have FX in it. So we're predicting FX in advance of 12 months and predicting mix over a wide diverse portfolio in terms of gross margin. So we need to give ourselves a little bit of latitude there. As I mentioned in the previous question before, the good news is that refrigeration is coming back and in terms of absolute profits, it's 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, well, could that revenue be higher? Are we at an inflection point because there's really going to be -- and we're under forecasting refrigeration for the year. In a way, 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 we'll take the absolute profit. So it's our best guess right now. I guess, at the beginning of the year, we like to give us some latitude. I think that the history around here has been to try to hit the top, and we've caught every intention of trying to do so.

[Nigel Coe:]

And then my follow-on is really the comment around the prebuy in PRAs or preordering because of supply change constraints, which makes total sense, and we're certainly hearing about supply chain constraints. But are you getting this feedback from customers? Is it your gut instinct telling you that this is happening? And therefore, should we expect there to be maybe a moderation in order rates in 1Q sort of as a consequence of that 4Q dynamic?

[Richard Tobin:]

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 one of the things we're digging into. But based on what we're seeing, in our own operations and the guidance that we are 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're doing it, my expectation is that everybody is doing it. So I think it's to the detriment of order rates through the balance of the year? No, I don't. Because I think the backed in -- 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's some amount of -- and look, at the end of the day, you get a backlog that's in access to your first quarter production, you're probably not going to get it out anyway. So the good news, I think when I answered sprague before is, you know what, the longer -- the bigger the backlog that we have, the more efficiently we should be able to run our factories, and that's margin accretive.

[Operator:]

The last question comes from the line of Deane Dray with RBC Capital Market.

[Deane Dray:]

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? Does it have to be retrofit? And how do you think this trend develops from here?

[Richard Tobin:]

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 3 to 5 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 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 readily available.

[Deane Dray:]

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

[Richard Tobin:]

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

[Deane Dray:]

Could you be flexible in terms of your supply chain in terms of doing some sub as kind of lays in the U.S. to qualify? Just the last time just went through, that's what we saw companies were speaking on the on side.

[Richard Tobin:]

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

[Operator:]

That concludes our question-and-answer period and ends Dover's Quarter fiscal Year Ending 2020 Earnings Conference Call. You may now disconnect your lines at this time. Thank you.