Dover Corporation (DOV) Q2 2008 Earnings Report, Transcript and Summary

Good morning and welcome to the Second Quarter 2008 Dover Corporation Earnings Conference Call. With us today are Ron Hoffman, Chief Executive Officer of Dover Corporation; Bob Livingston, President and Chief Operational Officer of Dover Corporation; Rob Kuhbach, Vice President of Finance and Chief Financial Officer of Dover Corporation, and Paul Goldberg, Treasurer and Director of Investor Relations of Dover Corporation. After the speakers' opening remarks, there will be a question-and-answer period. [Operator Instructions]. As a reminder, ladies and gentlemen, this conference call is being recorded, and your participation implies consent to 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. Paul Goldberg. Mr. Goldberg, please go ahead, sir.

Thank you, Biona. Good morning, and welcome to Dover's second quarter earnings call. With me today are Ron Hoffman, Dover's Chief Executive Officer; Bob Livingston, Dover's President and Chief Operating Officer, and Rob Kuhbach, our VP of Finance and CFO. Today's call will begin with some comments from Ron and Bob on Dover's operating and financial performance. We will then open the call up to questions. In the interest of time, we kindly ask that you limit yourself to one question with a follow-up. Please note that our current earnings release, investor supplement and associated presentation can be found on our website, www.dovercorporation.com. This call will be available for playback through 5 p.m. August 6th, and the audio portion of this call will be archived on our website for three months. The replay telephone number is 800-642-1687. When accessing the playback, you will need to supply the following reservation code, 54682754. Before we get started, I'd like to remind everyone that our comments today, which are intended to supplement your understanding of Dover, may contain certain forward-looking statements that are inherently subject to uncertainties. We caution everyone to be guided in their analysis of Dover Corporation by referring to our Form 10-K for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statement. We also undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. We would also direct your attention to our website where considerably more information can be found. With that, I'd like to turn this call to Ron.

Thanks Paul. Good morning everyone. Thank you for joining today's conference call. Today we are pleased to report on Dover's strong second quarter results. Quarterly revenues were over $2 billion for the first time in Dover's history, an increase of 10% over the previous year. Three of our four segments set new quarterly revenue records, and all were up sequentially. Net earnings from continuing operations increased 7% to $187 million, with Electronic Technologies posting their best earnings since Q4 of 2006. Diluted earnings per share from continuing operations were a record $0.98, up 16% over the prior year. Year-to-date revenue was $3.9 billion, up 9% with net earnings of $335 million, up 7%. Diluted earnings per share from continuing operations for the year were $1.74, up 15% over the previous year. For the quarter, Dover posted operating margins of 15.8%, up 20 basis points over the prior year and up 170 basis points sequentially, reflecting strong leverage at Electronic Technologies and Fluid Management. These margin increases were delivered by continued improvements in operating efficiencies and proactive pricing actions, offsetting the challenges of significant material cost increases. Fluid Solutions, Energy and the Product Identification platforms, which comprise slightly under 50% of Dover's total segment earnings, led the quarterly improvement. Each of these growth platforms produced quarterly earnings improvement in excess of 15% and continues to benefit from healthy end markets, cost reductions, pricing actions and synergy initiatives. We strongly believe that these growth platforms serve global serve global markets that can continue to grow. Our Energy platform, which is a significant differentiator for Dover relative [ph] to other industrial peers, posted strong organic growth for the quarter. The continued demand for energy where the oil, natural or power generation equipment is driven by high commodity costs and strong global demand. Product Identification continues to grow globally, fuelled by the increased demand in logistics, traceability and consumer safety applications. Bookings were $2 billion, up 6% over the prior year, led by strong growth at the Electronic Technologies segment as well as the Energy, Fluid Solutions and Product Identification platforms. Backlog was $1.6 billion essentially flat with last year but up 8% from 2007 year end. Dover's 10% quarterly revenue growth consisted of 5.4% organic growth, a 270 basis-point improvement over the first quarter. Acquisitions accounted for 1.3% and the impact of foreign exchange was 3.5%. Organic growth for the full year is still anticipated to be roughly 4 to 5%. Free cash flow for the quarter was $192 million, 9.6% of revenue, driven by increased earnings and continued improvements in working capital. Year-to-date, we've generated $301 million of free cash flow, up 29%. We remain on target for another full year where our free cash flow will exceed 10% of revenue. From a strategic capital allocation perspective, Dover continues to be highly disciplined and evaluating potential acquisitions as we focus on synergistic add-ons within our targeted platforms and segments. We invested $77 million for two add-on acquisitions early in the second quarter. As previously identified in our first quarter earnings call, Neptune Pump joined our Pump Solutions Group and Brady's bits [ph] was added to the Energy Products Group. These acquisitions will be slightly accretive to this year. We anticipate 2008 acquisition spending to be similar to 2007. We repurchased $198 million of Dover stock during the quarter and anticipate finishing our $500 million share repurchase program during the third quarter. When completed, Dover will have repurchased $1 billion of shares and reduced our share count by roughly 10% over a 12-month period. Year-to-date, our repurchase activities have resulted in a $0.12 EPS improvement, excluding the interest expense. During the second quarter, we made two changes with regard to discontinued operations. We have moved Triton from Engineered Systems to discontinued operations in anticipation of the completion of its sale in the near future. The discontinuance of Triton and subsequent write-down of its carrying value resulted in a $51 million loss during the quarter. We also moved Crenlo from discontinued operations, back to continuing operations, in the Material Handling platform within Industrial Products. After fourth quarters in discontinued and after selling off the underperforming portion of this company, we have not received an author reflecting the true value for the Crenlo cab enclosure business. Recognizing the limited opportunity to sell this property in today's climate, we will continue to operate Crenlo and seek potential operating synergies within our Material Handling platform. The net effect of these two changes to our quarterly continuing operations results was a net positive of $0.01 diluted EPS and $0.02 year-to-date. Effective July 1st, Bob Livingston was promoted to President and Chief Operating Officer of Dover. Bob, who was President and CEO of the Engineered Systems segment, has been with Dover for nearly 25 years. I am extremely pleased that he has accepted the challenge of his new position and look forward to working with him through this transition. With that, I'd like to turn the call over to Bob, so he can update you on our segment performance. Bob?

Thanks Ron. Thanks for that warm introduction. I am very excited about my new role and I look forward to building on the improved performance of Dover that will deliver increased shareholder returns. I am pleased to report on this successful quarterly results posted by our company. At the Industrial Products segment, which accounts for 32% of Dover's revenue, sales were $649 million, up 6% over last year with bookings of $631 million or a book-to-bill of 0.97. Earnings of $88 million were essentially flat from the second quarter of '07, which benefited from a $5 million one-time property sale gain. Excluding this one-time gain, earnings would have been up 5% with margins of 13.5%, essentially flat with last year. The Material Handling platform reported increased sales and earnings of 2% and 4% respectively. Quarterly bookings were $313 million or a 1.02 book-to-bill. Improved industrial market sales at Warn and Texas Hydraulics with the acquisitions of IMC by DE-STA-CO and Lantec by Tulsa Winch offset lower construction market sales at Paladin and Crenlo. Improved platform margins resulted from internal cost improvement initiatives and price increases that offset significant increases in steel, energy and transportation costs. Restructuring and consolidation efforts continue to be implemented to ensure the material handling businesses are run efficiently based on current and anticipated market conditions. Military, industrial and energy-related markets should continue to perform well, but we do not anticipate improvement in the automotive or construction businesses during the second half. The Mobile Equipment platform increased sales by 9% while earnings decreased 3%. Adjusting for the one-time gain on the property sale previously mentioned, platform earnings would have been up 7%. Quarterly bookings were $318 million, led by increases in refuse and aerospace, but offset by declining sales in the automotive sector and North American tank trailer demand. Backlogs remain strong at $549 million. Heil Environmental continued to grow market share while margins were challenged by rising steel and freight costs. At Heil Trailer, strong military and sand trailers offset weakness in petroleum and dry bulk trailers. Sargent's improved performance reflected positive strength in its commercial aircraft market while Rotary Lift delivered record sales and earnings. Results were sluggish at PDQ, Chief and Performance Motorsports, reflecting slower discretionary spending in North America. At the Engineered Systems segment, which accounts for 27% of Dover's revenue, sales were 539 million, up 6% over last year with bookings of $530 million or a 0.98 book-to-bill. Earnings of $80 million were up 3% with a 14.9% margin, down 40 basis points over the prior year period. Our Product Identification platform again posted impressive performance. Significant leverage was displayed as revenue increased 11% and earnings grew 15%. Our Direct Coding business, which is essentially Markem-Imaje, continues to produce very positive operating results, reflecting strong global market conditions, a robust product portfolio and an accelerating integration program. Recurring revenue remains above 50%. The Engineered Products platform posted sales up 2% over... year-over-year while earnings were down 7% over the period. Sales gains were posted at all companies except Belvac. Hill PHOENIX had a strong quarter as it continues to gain new customers and increase sales with new products at existing customers. The decline of new store construction at Wal-Mart will continue to impact our business in the second half of the year. Hill PHOENIX's specialty case business continues to grow, fueled by increased prepared food offerings at supermarkets. Hill PHOENIX's continued focus on price management is offsetting significant material price increases and is stabilizing margins. SWEP posted sales gains in North America and Japan and opened a new facility in China during the second quarter. Our Fluid Management segment, which accounts for 22% of Dover's revenue, continued its trend of double-digit growth. Revenue was $447 million, up 23% over last year with strong bookings of $470 million or a 1.05 book-to-bill. Organic growth for the segment was an impressive 16.5% for the second quarter. Second quarter earnings of $98 million were up 34% over the prior year period with 30% operating leverage. Operating margins were 21.9%, up 170 basis points over last year. Both the Energy and Fluid Solutions platforms continue to benefit from very strong global demand. Our Energy platform continues to perform at an exceptionally high level across all companies, led by the specialty diamond drill insert business. Second quarter revenue and earnings for the platform both increased 25%. Globally, high energy prices, increased drilling activity, strong oil and gas consumption and new power generation projects continue to provide a very positive climate and outlook for these companies. Double-digit sales and earnings gains over the prior year were posted on all energy companies. Synergy integration programs are being pursued with the gas equipment and artificial lift businesses to optimize future results. Waukesha Bearings reported its first significant order in Russia for magnetic bearings for gas compression equipment. The Fluids Solutions platform continued to benefit from its global customer base. The platform posted very strong quarterly revenue and earnings gains of 20% and 35% respectively. Similar to our Energy platform, every company within Fluid Solutions experienced double-digit gains in sales and earnings, driven by strong global demand for pumps, dispensing systems and quick disconnect couplings. We have also seen significant internal improvements from the formation and subsequent ongoing integration of our Pump Solutions Group. These improvements are coming in the form of capacity utilization, global sourcing and cross selling opportunities. With backlog up 28% and a strong book-to-bill of 1.03, we expect Fluid Solutions strong performance to continue. The Electronic Technologies segment, which accounts for 19% of Dover's revenue, had its strongest quarter since late 2006. Revenue was $380 million, up 12% over last year with bookings of $385 million or a 1.01 book-to-bill. Earnings of $51 million were up 13% while margins improved 10 basis points to 13.4%. The quarter's strong performance was led by Knowles, Everett Charles and the Ceramic Products Group. Knowles experienced strong customer demand for their hearing aid components in quarter two and continues to develop new products for that steadily growing end market. Knowles also experienced some important customer wins in its MEMS business, offsetting the softness at Motorola and Sony Ericsson. Knowles' MEMS microphones are now being used by everyone tear 1 handset manufacturer in the world. They have also been successful in penetrating other growing markets like notebook computers, digital cameras, gaming consoles and GPS terminals. Everett Charles saw increase demand in the second quarter across all its businesses with the exception of the semiconductor test group. Now that I have run through the segments, I would like to briefly discuss our progress in synergy capture and materials pricing. First, synergy. As you know, we have made a commitment to deliver $40 million to $60 million in earnings improvements over the next two years, supported by our four segment realignment and synergy opportunities. We are well on our way to achieving that target and then some [ph]. Business combinations and integrations such as the formation of the Pump Solutions group, the combination of Alberta Oil Tool and Norris and the Markem-Imaje integration are highly visible examples of these initiatives across Dover. These business consolidations are near and dear to my heart as I've been closely involved with the Markem-Imaje integration and also the Vectron CFC merger of a few years ago. I have personally seen the earnings power realized by capturing that integration value. We are making this happen all around Dover. Markem's MEMS [ph] margins have improved about 9 percentage points since we acquired the business about 18 months ago. I am committed to pushing the synergy agenda forward without compromising the creativity and the entrepreneurship that is so fundamental to Dover. In the second quarter, our synergistic activities, including business integration and procurement initiatives, resulted in $0.03 EPS benefit net of costs. As far as material prices go, we along with every other industrial manufacturer, experience significant price increases across a wide range of materials. Metals, in general, and steel, in particular, pose the greatest impact to Dover. In total, metals account for about $1.5 billion of spend for Dover on an annual basis. So far, we have done a superb job of raising prices where appropriate and hedging our costs where possible. We are hopeful that raw material prices stabilize through the back half of this year, but remain cautious in our outlook. It is unreasonable to expect that we'll recover 100% of our cost increases, but we will remain diligent in our efforts. In the second quarter, the EPS impact of higher input costs was negligible due to the previously discussed initiatives. In total, this was a very successful quarter of growth and positive leverage with Dover. I look forward to building on these results in future quarters. And with that Ron, I'll turn the call back to you.

Thanks Bob. Before we close, I would like to clarify my own situation. And so you end on our succession process. As I came to New York five years ago, I began a process to re-energize Dover's value creation. During that time, we have completely revamped our portfolio of operating companies to focus on market sectors that have higher growth prospects, better earnings potential and more global engagement. This process culminated in the four segment reorganization of Dover last year to provide the opportunity to capitalize on potential synergies which will maximize Dover's future results. We also believe that this new structure clarifies the true focus of Dover for our shareholders. In 2005, we implemented the performance counts program that has focused Dover companies on attaining world class operating standards. Dover has significantly improved on each of our five metrics and there are great opportunities to build on this process. Personally, I've had a tremendously rewarding career over the past 38 years and have been very fortunate to have experienced the unique challenges and pleasure of owning a company and managing the transformation of a great Fortune 500 company, like Dover. I've discussed with the Board, my intent to retire when a new CEO is selected. I am proud of the changes I have brought to Dover, but believe that a new leader should have the opportunity to put his stamp on the future processes and techniques that will continue to create synergistic improvements and increase value for our shareholders. I will not fully retire until a new CEO is named. We have a great internal candidate and the Broad is appropriately exploring external candidates as well. Through this deliberate process, I am confident we will find the right executive to lead Dover to new heights. Looking forward, I am very proud of the many record results posted during the second quarter, despite a challenging economic environment. Our business leaders continue to focus on internal process improvements, synergy capture, pricing opportunities and managing the significant ways of material price increases. Those same dynamics will be present next quarter as well. Overall, our bookings have held up well, and we are positive about the continued growth opportunities in the Energy, Product Identification and Fluid Solutions platforms. Our Electronic Technologies businesses posted their best quarterly results since 2006, driven primary by gains in Asia. We are very happy with this progress but continue to be cautious of their markets. We anticipate continued material price increases but we are encouraged that our leaders are implementing pricing increases to offset the majority of these costs. I am confident our business leaders will do the right things where there is new product development, best cost country sourcing or passing on price increases to assure the continued success of Dover. This continued focus on performance improvements to maximize the results of our global business environments along with our strong cash generation are very encouraging, and accordingly, I remain confident that Dover will deliver on our earlier guidance of 12% plus annual EPS growth. However, be assured we stand ready to quickly implement energy plans and appropriately adjust our businesses, should the environment materially change from our expectations. With that, I'll turn the call back to Paul Goldberg for questions.

Thanks Ron and Bob. At this time, I'd like to ask Buena [ph] to queue the questions and I'd like to remind you again please if you can limit your questions to one with a follow-up, so that we would be able to get everybody involved. Buena? Question And Answer

Thank you. [Operator Instructions]. Our first question is coming from of Wendy Caplan of Wachovia.

Good morning Wendy.

Good morning, good morning. Could we talk a little bit about the book-to-bill in the segment? Looks like Fluid Management and Electronic Technologies still above 1, but the other two segments look a little weaker. Notably Engineered Systems, which I am guessing is from the Engineer Products lumpiness. But if you could kind of expand on, on that those two segments' book-to-bill, please.

Wendy if I might, just to kind of put this into reference, again our orders were up year-over-year by about 6%. The trade of those orders were very similar to last year in terms of kind of where they hit. But the segments you talked about were the weaker of the four. However, that's not totally untraditional. Some of that's a reaction to some of the changes that Wal-Mart is bringing into the marketplace, as well as the Belvac which is certainly seeing a different hand making opportunity this year versus past year. That's just more of a market change of opportunities. Those are project-related businesses.

Wendy, this is Bob. At Engineered Products platform, our book-to-bill for the second quarter was 0.97. And as Ron mentioned, the real significant decrease year-over-year was at Belvac, and that's just we're just in a down cycle right now, and sort of a multi-year project phase that some of their customers go through. A little bit of a negative comparison at Hill Phoenix, for year-over-year, that again, mostly due to the decline of new store construction at Wal-Mart. And the rest of the businesses in that group held up fairly well.

Okay, thanks. I'll get back in queue. I appreciate it.

Thank you, Wendy.

Thank you. Our next question is coming from Terry Darling of Goldman Sachs.

Thanks. Wondering if you could comment a little bit on what you see changing on three items for the second half of the year, that you've addressed that sort of implicitly a bit first, on organic growth, 5.5% or so, this quarter, very strong. Looks like on a book-to-bill, we ought to see that pullback a bit. And then wondered if you could also talk about this raw material price, continuing into the second half. You're being cautious on it. Is that just based on the macro factors? Or do you have some visibility on that, continue getting tougher for you?

Kind of addressing each of those questions, certainly from an organic growth standpoint, we've identified that we forecast 4 to 5% organic growth through the remainder of the year. There's not a lot of acquisitions that we did in the end of '07 that will fuel acquisition growth. So we still feel pretty good about that number. I would also say that referring to, back to our book to bill I think, we kind of covered it fairly well in the last comments but there wasn't anything significant in the market that really caused us to see a significant change in business level. We were up year-over-year. We continue to feel very strong about the oil market. We continue to believe their product ID is going to hold up well. Electronics certainly has a nice comeback in the quarter where we would like to think that we'll see some of that hold up, but that's always a bit of a variable market. But we still feel pretty good about the economy right now. Terry, it's been a pretty strong year so far. Racking the raw material prices, I think we've done a number of things to prepare our companies to be less a more proactive as it relates to the raw material pricing and kind of how we handle that. We did a lot of moves of our companies to Mexico to other Eastern block companies to increase our presence in Asia over the last couple of years. There was cost associated with that. I think we are getting the benefit of that now. I think our companies have internal initiatives on synergy. They are making it more efficient and then I think we are doing a much better job of analyzing the real value we bring to our customers and appropriately pricing through that. And I think those things in total have caused us to offset majority of our raw material price increases year-to-date.

And then just a quick modeling question. Can you talk about the sequential increase in net interest expense and the year-over-year decline in free cash flow, and what you are expecting on interest expense and free cash flow on the back half of the year?

Yes, from an interest expense, it was really just driven by probably a more accelerated share purchase than we originally laid out. So that dropped our net debt up about $0.5 billion. And the difference in the interest expense is the delta effect. And what was the second half of your question?

Well, Paul, just to clarify, net debt up 500 million. You only repurchased 198 million in the quarter, so --

Yes.

And working capital as a percentage of sales was actually down year-over-year. So what am I missing there?

Well, if you look at it, when we started the share repurchase program, if you go back exactly a year, we hadn't done any real significant share repurchase. We really started in earnest in August of last year. So that a pretty hefty amount of share repurchase in a relatively short time. And from a free cash flow perspective, we had very strong free cash flow in the first quarter and the second quarter was relatively strong. So on a comparable basis, we are up 29% year-to-date over last year.

Okay, I will follow up. Thanks.

Yup.

Thank you. Our next question is coming from Alex Blanton from Ingalls Snyder. Alexander M. Blanton - Ingalls & Snyder: Good morning. I wonder if you could give us a flavor for the trends geographically, what your potential exposure is to Europe, which is weakening in many countries and how much benefit you might be getting from strength in Asia and Latin America?

Alex, that is always very company specific and market specific. But I think we have a slide in our deck that shows our growth rate year-to-date. And the majority of our growth has come in Asia; that's been electronically driven. Plus, the other companies that we have that have strong Asian presence such as Knowles and others. Europe for us was actually up from a growth rate standpoint this year over last. Again, we have some businesses performing well there. Imaje, our product ID company certainly is located in Europe. SWEP [ph] has had a very good run in its heat exchanger business in Europe and we continue to see radar continues [ph] to build. They opened a new plant in China during the quarter. So they will... that will be increasing their international presence. So across the board, pretty good global engagement here. I know a lot of people are talking about Europe pulling back. Our rate of growth in Europe has kind of held in there fairly well. In fact, DE-STA-CO, which serves the automotive market in general is down certainly in U.S. The project with Audio and VW or Volkswagen in Europe have continued to keep that business quite active. Alexander M. Blanton - Ingalls & Snyder: Okay. A second question is on the corporate SG&A. It was up about 74 basis points year-over-year and that hurt... well, there may have been a good reasons for that. But had it not been up, it would have added 0.06 or $0.07 to the earnings per share. So could you give us the reason for that? Is it a product mix change or is it additional spending of some kind or what?

We've had... Alex, this is Rob Kuhbach... we've had somewhat higher professional fees and we had to make some adjustments in our contingency reserves. We don't expect that to continue. The second quarter was somewhat higher than we expect, and I would say we've adjusted our overall annual corporate spend rate. If you look in the outlook stage on the slide, we head up [ph] slightly from probably a total of $5 million from where it was at the end of the first quarter. I would say the lion's share of that is some consulting fees that we've been engaged in. And part of that relates to our integration process planning and the overall business improvement process. Some of that we have absorbed at the corporate level rather than run it through the individual operating company. So I would say it's largely professional fees. Alexander M. Blanton - Ingalls & Snyder: Yes, what was that number you just referred to?

If you look in our slide, we have an outlook on corporate expenses, and we've raised the estimated year... full year number by roughly $5 million. Alexander M. Blanton - Ingalls & Snyder: But that's already been taking is what you are saying?

What I'm saying is the lion's share of it we think has been absorbed in the second quarter delta. Alexander M. Blanton - Ingalls & Snyder: Yes. Okay. Thank you.

Thank you. Our next question is coming from Scott Davis with Morgan Stanley.

Great, good morning guys.

Hey Scott.

Maybe tough question to answer, but given that you are 95% FIFO accounting, Rob, do you have a feel for either, A, how much that kind of helped you on a price cost basis this quarter or B, maybe how far behind the price cost curve... I mean I know that buys you a little bit of time to raise prices from an accounting perspective. But how much pressure does that put on you for 3Q to really get prices in?

I would say the impact on Dover... first of all, not a lot of our companies are actually on FIFO or a little more on [ph] LIFO. So we don't have the same... the other way around... I am sorry. So we don't have as much of an impact as companies that are entirely on that system. But I would say that our ability to manage through exercise is very high. We don't expect that to have much of an impact for the quarter or the rest of the year.

Okay, good. And when you talked about Electronics really had a nice positive surprise this quarter, and that begs the question when you look at the book-to-bill, was there any kind of pull forward of business ahead of announced price increases that you are aware of?

I would say in general that we didn't see any significant... I mean, obviously, pricing has been going on all year and will continue to go on. I don't think there is anything significant that you record. It's immeasurable if there has been any impact at all.

Okay. Last question on Paladin. It's... can you give us an indication of the rate of change? Is it still negative? Have we stabilized at all at lower levels or are we still going down?

Well, I would... certainly, the demolishment recycling market of Paladin has continue to hold strong. That's been really the highlight of that marketplace. The utility business within Paladin has really performed well. Heavy construction, light construction certainly has been down. We don't anticipate any significant change or improvement in that through the course of the year. I would also point out, though, Scott, even with those challenges, we have been doing significant things behind the scene to improve our cost base in that business. We have also been seeking greater synergies among our companies. We have closed some plants to streamline the business, and that business was a double-digit margin business in the second quarter.

Okay. Ron, congrats. A little early congrats on your retirement and thank you for your time and the last field trip was very good. Thank you.

Thank you, Scott.

Thank you. Our next question is coming from Steve Tusa with JP Morgan.

Hi, good morning.

Good morning Steve.

Hi Steve.

Congratulations Ron. You have done a lot over the last couple of years and we appreciate everything you have done, and second that on the trip a couple of months ago.

Thank you.

Just on the outlook. When I look at your normal seasonality from the second to the third quarter, you usually have somewhat of a bump up there, maybe 5 to 6% growth quarter-over-quarter. Is there anything you're seeing out there in the near term that would throw you off your... the normal seasonality?

I think you're comment on seasonality is directionally somewhat right, Steve. It's very historical. I would think the peaks in values [ph] of that may be somewhat muted and it will be a little flatter as we look at where we are at compared to the remainder of the year. Not a lot of seasonal impact probably from second to third quarter.

Is there anything out there? Is it... is that raw materials-related? Is it just the change in the portfolio? Is there something going on at oil and gas that slows down... that drives that?

No, there is nothing of seasonality about oil and gas. Typically, the things that would come to play there is if you have a real rainy season that takes people out of the market or allows them not to get into certain fields. But I would say, we don't anticipate any seasonality issues. We do get into some construction issues that might impact new store constructions or things that would impact like with Hill PHOENIX, or it might impact our PDQ building, some of their involvement or even stations that OPW might serve. But not a lot of that Steve; it's going to be highly intensive quarter-to-quarter. It's really... there is nothing out there that I would put my finger on at the moment, any of our sectors that we look at and fret about really to seasonality for the remainder of the year.

Okay. And then one more question just on the 12% plus growth guidance. That's on the new continuing ops number, correct? So as Crenlo comes back into the fold, that adds a few pennies?

Well I think what we've done, Steve, is if you recall, last quarter as we did the guidance, we said 12% plus on the number that we have at that time. I think there is a 4% or... excuse me, a 2% change year-to-date. Certainly, that should be added to the numbers... $0.02, I'm sorry. Paul, do you have anything to add on that [ph]?

Okay. Great, thanks a lot.

Yes, just to clarify it a little bit Steve, the guidance that we're still holding to our guidance, which was off the 3.22 of last year and it is appropriate to add in $0.04 to this year for the Triton Crenlo discontinuation... re-continuation, for lack of a better word.

Right.

Is that clear?

That's clear. Thanks a lot.

Steve, one other clarification. You should anticipate that the third and fourth quarters will be more balanced as opposed to what you are talked about the sourcing on the seasonality.

Okay. So maybe not as strong in the third, but not as weak of a drop off in the fourth?

Exactly.

Okay, thanks a lot.

Thank you. Our next question is coming from John Inch from Merrill Lynch.

Thank you. Good morning

Good morning, John.

Good morning. Ron, I echo [ph] your sentiments. So on the just as the clarification, so the $0.04 of contribution from the impact of Crenlo and Triton. So Triton was... I think, it was just kind of breaking even. So the $0.04, is that really the way to look at a penny of contribution from Crenlo? Is that per quarter, is that the way to think about it?

I think last year, when we looked at last year Triton had a significant loss and so in effect, Crenlo, so this year we are accounting as the penny a quarter. If you look at it as the price of Crenlo standalone, it would be more like $0.02 a quarter.

I see, okay. And then Bob, you mentioned that you guys had pretty much broken even on the raw side with respect to pricing, but --

John, could I just go back to last point?

Yes.

I just want to qualify. Triton was losing money at the beginning of last year. But as we exited last year, Triton was, in fact, making money. So just swapping out Crenlo and Triton it's just an incremental $0.01 per quarter going forward.

But if you... Paul, if you look at 2008, Triton wasn't really losing money, right? It was... you get...

No, they were.

Right, okay. So the incremental well comes from more from the Crenlo side versus Triton.

That's exactly the case; that's right.

Okay. So then I want to go back to Bob's point about how kind of rise in pricing pretty much broke even in the quarter. Yet if you look at the Engineered Systems and the Industrial Products businesses, they didn't have as good leverage, and kind of some of the implications is maybe some about was the impact of raws. But you're saying that's not... that's the case. Is that the way to look at it?

This is Bob. I'm not a moving part in both those segments.

Right.

But even if we were to able to do a 100% pass-through of material cost into pricing or offset it with hedging, the impact of that is you get it doesn't benefit you with respect to leverage. That's just the way the math works. The difference between the two segments, and I'll speak specifically to Engineered Systems, is that even though we had some significant price increases coming through during the first half of this year, especially in steel that we were able to pass through some of those charges with the coverage on existing customer contracts. But in a couple of instances, we also had pretty favorable hedging positions that were in position through June, through July and sometimes through August. So it's been a mixture of activities, some of it pricing, some of it hedging, some of it resourcing some product.

John, I might also add that Crenlo is now a part of the Industrial Products. It was added back into that group. Its margins are a little below the group in general. So it would have not been very aided to their ability to leverage in the quarter.

Okay. I guess the question is, do you expect leverage to improve in these two businesses kind of going forward or should we just is this an economy issue? Is it just yet to get in to business by business or how should we think about that?

Well I think the business has really performed at 13.5% margins in the quarter. I think there is some potential upside there that they should be able to find over time, whether it be pricing or whether it be internal initiatives and the synergy programs we're working on. In some cases, you have cost of product in order to capture those gains, and there was some plant closings that happened in the group, that we'll see benefit from going forward.

Thanks very much.

Thank you. Our next question is coming from Shannon O'Callaghan from Lehman Brothers.

Good morning, guys.

Shannon.

Hey question on the margins, I mean I am just trying to understand a little bit, kind of the reduction to the margin guidance. We started the year looking kind of 50 to 100 basis points improvement. Now we are looking for 25 to 50. I mean it sounds like, you've been doing a good job on price cost. Sounds like synergies are ahead of plan. So how would you characterize what changed to you are a little less optimistic in terms of the margin improvements this year.

Well I don't think we've really kind of changed our overall position in margin. If we look further up the curve at the end of the second quarter, we thought me might have been at this point which is a nice positive issue to have. I think we are just trying to kind of keep the guidance in line where we think we'll really finish up at. But certainly no lack of confidence in our part on the improvements going on in our companies. Bob, any thing to be added to that?

Well I would I guess the other comment would be, I think we are being a bit cautious just given the economic challenges we know we are facing in the second half.

So it's mainly on the economics, I mean you mentioned the hedges, is it... you said it was negligible price cost this quarter. I mean are you assuming it gets worse 3Q, 4Q or any any other dynamics?

To be honest, probably we're more concerned about quarter three than we are quarter four.

Okay. Can you just give a little more of the color, I guess, on what's going on in product ID? I mean the organic growth of the whole segment was sort of flattish. I mean you called out Belvac, it's not that big a business, but it sounds like it's pretty challenged right now. How is how is product ID doing organically?

Organic growth for product ID in the second quarter was 4%. Most of that most of the organic growth, or most of the growth, I'm not sure I can split it regionally on organic growth, but most of the growth that we experienced in the second quarter was led by Europe, Latin America and Asia, and North America was a bit flat but organic growth for the quarter was 4%.

Okay. And just one more, just on Crenlo, you mentioned, I think getting out of some of the underperforming parts of it before you brought it back in. I mean is Crenlo operating any better now than it was when you put it into dis ops [ph]?

Yes, it is. And Crenlo going to be a low double digit margin business, at least that's about where it's at. I think that we continue to believe those we put it back in our Material Handling group, as there might be some synergies that might share with our Palen [ph] business, and those are going to be explored, and hopefully we can find some additional benefits there.

Okay. So but it's being brought in, I mean if if you're pursuing those, this is going \to be this is going to be part of the portfolio, not something that, that might go back out the door again?

I think we're going to manage Crenlo as best of our ability to make it the best company possible in Dover. We'll reevaluate our positioning of construction equipment going forward, but I think in today's market, there's just not an appetite for that business currently.

Okay, great. Thanks a lot.

Thank you. And next question is coming from Nigel Coe of Deutsche Bank.

Thanks. Good morning.

Hi Nigel.

Just want to clarify the 12% question, is that 12%... is that up 322 or 326?

No, it's up 322, Nigel.

Okay.

And then you would add in the $0.01 incremental each quarter of this year, report that in total for the discontinuance of Triton and Crenlo.

Okay. And then the $0.03 net impact from synergies into the Q, you had mentioned though I think $0.02 of investments to achieve that. I mean how does that evolve, how is that $0.03 net evolved on over the balance of the year?

I would say that we anticipate continued progress when we talk about the original $40 million to $60 million over two years. That mathematically comes out to somewhere around $0.13 to $0.20. So we picked up a penny in the first quarter and $0.03 in the second. I would say you are likely to see something on the same order magnitude in the third quarter and the fourth quarter. Markem-Imaje will continue to be one of the principal drivers of that process. But there is a lot of activity in the same arena going on in other places like the Pump Solutions Group. So I think we feel confident that we are going to be well on track to achieving that kind of progress over two years.

I think we have high confidence. I think we continue to see a little bit more challenging material prices than we anticipated as we made our statement early on. But we are not backing off of it.

Okay. And then on Triton, I mean it's been struggling for the last couple of years now. I mean why... I mean, I am sure you are now aware of that, but why this quarter? Why do you pull the trigger this quarter?

I think we have a viable buyer currently in place that allow us to move the process forward. And we're taking advantage of that opportunity and this just happens to be the time that it was all in place.

Okay, fair enough. I mean just one more question, if I may. I mean natural gas prices have obviously spiked. That's generally good for gas drilling in the U.S., which is obviously good news for you. Are you seeing increasing activity in that field?

Quite candidly, as we see these spike ups, whether it be natural gas or whether it be oil prices, I think the oil patch is so active and utilization is so tight right now that you don't see significant peaks from that. I think capacity [ph] is very active. It just allows people to have confidence in continuing the projects they have out there, which means that the rigs will be active for a longer period of time. But I don't think we see a huge change in number just based on the price of oil and gas. I think quite candidly, I think as we head into the winner, depending on what happens in the winner timeframe, we might see natural gas continue to hold well, and that will continue to keep drilling activity high. I think Canada will probably improve its drilling in the second half of the year, maybe to what it was in the first half. And we are optimistic about that because we have quite a footprint of businesses in Canada.

Okay. Thanks. Thanks a lot.

We are somewhat over weighted on the natural gas side. If you look at our Energy group, as a general rule, we benefit more from gas drilling than oil drilling.

Okay. Thanks a lot.

Thank you. We have time for one more question. Our next question will be coming from Matt McConnell from Robert W. Baird.

Good morning.

Hi Matt.

Hey Matt.

Of the 1.5 billion that you spend on metals, could you give us a sense of how much of that is protected through long-term agreements or how much of your spend in the second quarter was at current prices or what had been protected before?

I think the one to clarify for you, Matt that the 1.5 billion was an annual spend.

Right, yes. And so of the portion that was in the quarter, how much of that would have been protected through longer term supply agreements?

A number of our companies have long-term hedging agreements to try to minimize their price increases. I will say those have been much more difficult to enforce as we [ph] progress through the course of the year. But again, we're very comfortable in the second quarter that we did recover the majority of the price increases, whether they be through pricing or through internal improvement initiatives. So there was a significant impact in the second quarter. I think that will become a steeper challenge as we move throughout the remainder of the year.

And I would just say, Matt, that we don't have that number in exact detail. But I would say more recovery was through price increases than hedging from my knowledge of the business.

Yes, for sure.

Okay. Great. Thank you very much.

Thank you. At this time, I would like to turn the floor over to Ron Hoffman for any closing remarks.

I think our second quarter was a clean quarter in terms of there wasn't a lot of ins and outs of various cost issues. I'm glad to see that we're moving forward with getting the Triton business sold. I know that's been a bit of a question for many analysts for a period of time now. I do think the synergy initiatives that are going on inside of Dover are really catching some nice adherence. And I think I am encouraged, and Bob commented on his prepared remarks that we believe we're ahead of pace and also identifying maybe more opportunities than we initially had thought of. So we look forward to reporting more on that as we move forward. And we look forward to chatting with you again in the third quarter and having good results to talk about at that time. Thanks. This concludes our conference call. Of course, we thank you for your continued interested in Dover and look forward to speaking with you again next quarter. And if there are any follow-up questions, please give me a call.

Thank you.

Thank you. That does conclude today's second quarter 2008 Dover Corporation earnings conference call. You may now disconnect your lines at this time and have a wonderful day.