Paul Goldberg - VP, Investor Relations
Bob Livingston - President & CEO
John Hartner - President & CEO, Dover Printing & Identification
Tom Giacomini - President & CEO, Dover Engineered Systems
Bill Spurgeon - President & CEO, Dover Energy
Jeff Niew - President & CEO, Dover Communication Technologies
Brad Cerepak - SVP & CFO
Shannon O'Callaghan - Nomura Securities
Nathan Jones - Stifel Nicolaus Weisel
Dover Corporation (DOV) Annual Investor Day & Initiates 2013 Guidance Conference Call December 10, 2012 1:00 PM ET
So, good afternoon everybody. Welcome to Dover Day. I can't believe it’s been a year since the last Dover Day, time flies. Hopefully, you’ll find our program really informative today. We spend a lot of time putting it together. I think we are providing some really good information. So hopefully you enjoy it.
Very quickly I would like to go through the agenda. We are going to start with some opening remarks from Bob and he will talk about the strategy and some other interesting things and then we are going to jump into to John Hartner, he will let you know what's going on in Printing & Identification. After that, we are going to have Tom Giacomini who will talk about Engineered Systems particularly the Anthony acquisition. He will give you a lot of information on that.
We are going to have a short break after that. We will have some coffee and refreshment outside, so you can mingle with the management team. And then we will come back and Bill will tell you what's going on in Energy and talk about production in downstream which we are pretty excited about. And lastly, well not lastly, but the last segment presentation is from Jeff Niew and Jeff will talk about particularly the handset market and tell you some of the nice progress we've been making at Sound Solutions and why we are excited about the market in 2013. And then Brad will tie it all together with our outlook for 2013 and for the first time I think since I have been at Dover we actually provided guidance at Dover Day, so hopefully you find that helpful. And then Bob will have some closing comments and we hope to have maybe about half hour of Q&A. So that's the agenda. Its’ going to go fast.
And before we get started, we have the obligatory forward-looking statements. We want to remind everyone that our comments may contain and will 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 10K, for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statements and of course you can always look at our website, www.dovercorporation for a whole lot more information.
And with that, without any further ado I would like to invite Bob Livingston up here and I hope you enjoy the day. Thanks.
Thanks Paul. It does seem like it’s been a year Paul, in fact it’s been a year and a week since our last gathering here. Good afternoon everyone and thanks for taking time to joining us for Dover Day 2012. We are delighted to have this time with you today.
For over 50 years Dover’s success has been linked to our unique entrepreneurial business model that focuses on product innovation and our customers. We have in the past few years expanded upon this model and are also heavily concentrating on developing our talent and leveraging our scale. As you entered the room today, you may have noticed on the screen a slide that we believe clearly captures the essence of Dover and if you are looking at your handout book, its reprinted on the inside front cover of today's book. I'll be talking more about that in just a moment.
So let's begin. During my opening remarks today, we will start by reviewing Dover strategy. We remain on-track and firmly committed to executing against this strategy that we outlined to you about four years ago. Next, we will take a closer look at what we've accomplished in 2012 and a few comments on the fourth quarter.
We've made a few announcements, a couple of announcements in the past few weeks. These announcements can be characterized into two distinct areas. One area deals with capital allocation, while the other focuses on the ongoing strengthening of our portfolio towards higher growth markets and more consistent earnings streams.
Finally, we will initiate guidance for 2013 today. While I’ll touch on some of the highlights across Dover, our segment leaders will take a more in-depth look at many of the exciting initiatives that are driving their businesses. You will hear that we had many positive activities going on around Dover, which provide us with solid momentum as we enter 2013. Last year, the theme of our meeting was positioning for growth. This year, we want to talk about our strengthened company.
First, let me share what I believe have been the attributes and characteristics behind the success we've had for the last several years. We firmly believe that our track record of success is truly based upon several factors; our core technological advantage, both the technology that we’ve developed internally as well as the technology that we look for and acquire. Our leading brands in the industries we serve; our commitment to industry leadership through innovation and building scale and our dedicated and strong focus on the customer.
To give you some data points on our track record of success, our 10-year revenue CAGR is 11%. We have improved segment operating margins. Our 10-year earnings CAGR is in excess of 15%. Our free cash flow remains very solid and consistently at 10% of revenue or better and I am pleased that 2012 marks our 57th consecutive year of dividend increases.
We changed our segment structure last year, as reflected on this slide. The change of allows us to better focus with a more balanced management approach on our five key growth spaces. These five spaces are highlighted in yellow. The change also increases opportunities for leveraging resources within the segments. You will note the change to the structure of the Dover Printing & Identification segment which has been streamlined to reflect our recent divestiture announcement.
I do want to point out that our growth space now represents 77% of our sales and 79% of our operating earnings. The five growth spaces are all areas of higher growth and we will continue to add capital to expand and grow the spaces even further. We believe we have been taking the right actions over the past few years and have significantly strengthened our company. We believe we are well positioned for further growth.
We have been sharing this chart with you for four years. We believe that these five macro trends provide tailwinds for Dover; especially for our five key growth spaces. You will find clear evidence of the importance of these tailwinds in our upcoming segment discussions.
A key part of our strategy for the last four years has been to expand our presence outside of our core markets in North America and Europe. A key focus for us has been Asia, specifically China. The chart on the right illustrates the success we’ve had in growing our business activity in Asia since 2008. About 16% of our revenue came from Asia last year and year-to-date in 2012 its 18%. We expect that growth to continue.
As a point of reference, our sales in North America were in the low 60s range just a few years ago and even though we are still growing nicely in North America, the growth in Asia has occurred at a faster pace.
We continue to leverage the strength of Dover in our activity encompasses a wide menu of initiatives such as productivity, supply chain, shared facilities and services and a growing focus on talent development. As we look ahead, part of our global growth will come from businesses that traditionally have not been as international as others. For example, our Energy segment has an excellent opportunity for international growth by leveraging the strength of their expanded product, technology and service offerings to new customers in the Middle East, Asia Pacific and South America. You will hear more from Bill on this later.
Even with the market challenges of a weak Europe, a slowing China and our disappointments with the early results at Sound Solutions; I’m very pleased with the performance we’ve delivered in 2012. Revenue will be up about 10% and this year we’ll mark another year of record earnings and expanding segment margins. We continue to execute on productivity initiatives and generating strong cash flow. We’ll talk a little later about this year’s highlights.
So let me give you a brief update on the fourth quarter. Our broad portfolio of industrial businesses in engineered systems continues to perform quite well and as expected. In Energy, the production and downstream businesses remain solid.
We continue to be quite active with the completion of oil wells specifically around our artificial lift products and tools. We’ve talked before about the problems and challenges at Sound Solutions.
We’ve been making progress and expect the fourth quarter to show sequential improvement in both earnings and revenue. Sound Solutions has also been quite active on many new designs and product development activities for 2013.
We’ve made some announcements in recent weeks. We are divesting the businesses in our electronics assembling and test phase. This market continues to be very inconsistent and though these businesses are very well managed and leaders and their respective market niches, the volatility of the market makes it quite difficult to generate consistent and predictable results.
We announced a $1 billion share repurchase program to be executed over the next 12 months to 18 months. Brad will give you an update on this activity later this afternoon. And we continue with our activity to build out our five key growth spaces.
We recently announced the acquisition of Anthony, so a quick summary of Anthony. First, it’s a business with whom we’ve had a long relationship. They have been a key supply partner to Hill Phoenix for several years. The purchase price was approximately $600 million and their 2012 revenue is slightly above $300 million.
In addition to significant cost synergies, we are very enthused about the market and expansion opportunities that are available. First, Anthony provides significant opportunities for cross selling of Hill Phoenix products in the same store channel, an area which we currently don’t participate.
Second, as you know Hill Phoenix has been growing north and south into Canada and Latin America and this business opens up a broader footprint for us with their operations in China and in Europe.
And lastly, we feel that this business on to itself will grow at a very substantial rate based upon the re-skinning and 'close-the-case' product offerings. Just to give you an idea of the opportunity, in 2012 'close-the-case' only represented about 10% of Anthony’s revenue. We think Anthony has a significant and very long tailwind behind it.
Let’s take a little different look at the significant changes we’ve made it at Dover over the last few years that we believe had greatly strengthened our company. We’ve talked about our strategy of building out five key growth phases and as you can see, this strategy is having an impact.
We're delivering more of our revenue and earnings from our growth spaces which have positive trends and stronger growth prospects due to favorable tailwinds around areas such as sustainability, energy demand and consumer safety to name a few, and four short years of revenue from our five key growth spaces has grown from 56% to 77%.
While we have been focused on deploying our M&A capital into these five key growth spaces, our businesses outside of these five growth spaces have also been performing quite well.
They had been growing at a rate above 3%, they’ve continue to improve margins and they’ve generated tremendous cash flow. The earnings and cash flow had been incremental to EPS and help provide the cash to invest in our growth spaces.
We have done 26 acquisitions over the last four years and we continue to see ample room to do more. Given the growth profile of our strengthened company, by 2015, our growth spaces will account for more than 80% of our sales.
Lastly, just to remind you that in this chart, our divestitures include not only the electronic equipment companies that we recently announced but also the previous divestitures in the construction space.
Let me show you how this change in our portfolio has improved our consistency of earnings. We measured the variation in our earnings over the last six years. Our earnings over this period which includes the recession shows a 15% variation to our average.
It is interesting to note that the divestiture of our construction businesses along with the planned divestiture of our electronic, assembly and test businesses will reduce our earnings variability by over 50%.
As we continue to shape our portfolio and focus on our five key growth spaces, we will continue to reduce our earnings variability. We believe that this performance, our performance will put us in the top quartile of our peer set. I am very pleased with the overall portfolio.
Dover is comprised of larger and strengthened businesses and very sizeable markets. We have significantly enhanced our businesses in artificial lift. We are now a full line acoustic supplier. We have been making investments in our fluids space and we would like to do more. And we have made investments in refrigeration and we really like our position in that space.
I am very pleased with the progress we have made on strengthening our company. As we look forward to the next three years, given the markets in which we operate and the strength in the position of our businesses, we expect our growth to remain above market rates.
As you will hear during the presentations from our segment leaders that will be coming up shortly, we have been increasing our investments in new products and R&D to enable us to continue to grow at above market rates.
We expect to grow 4% to 6% organically, complemented by acquisitions. We expect to expand segment margins for 19% and we will continue to generate free cash flow of 10% of revenue.
Today, we are initiating our 2013 guidance at 505 to 535. Brad will provide some details on this later. Our strength in company positions us very well towards our goal of achieving top quartile returns for our shareholders through consistently delivering increased earnings, cash flow and dividends.
Let me wrap up my front end comments by giving you just some of the highlights that you should listen for as our segment leaders present what they are doing to strengthen our company and drive shareholder value.
Engineered systems initiatives and new product offerings in the fluids and refrigeration spaces together with the acquisition of Anthony, significantly expands this segment’s portfolio and increases integrated solutions for our customers.
Communication technologies, the consumers’ ever increasing demand for better audio products in their mobile devices provide significant opportunities for growth and new market penetration.
Energy, there are significant opportunities to expand globally in production and downstream offerings, while Dover Energy continues to outpace market growth.
Printing and identification, new product launches together with the expansion of our core business and printing positions will drive global growth. That's a look at what we will be covering today. I want to again say how excited I am, about Dover’s prospects. I firmly believe we are a significantly improved company with the strategic acquisitions and divestitures that we have completed. Our composition and position and our key markets is better than it has ever been, and we believe we can further improve our position through continued greater investments in R&D and our people. I'm confident that 2013 will be another growth year for Dover, even in a challenging macro environment.
With that let me now introduce John Hartner, CEO and President of Dover Printing & Identification. Thank you.
Thanks Bob. Good afternoon everyone I'm happy to be here to presenting Dover’s Printing & Identification segment, DPI. Today I have two objectives; first, describe the new DPI, a more consistent, more focused and higher profitability segment, and secondly to describe how DPI achieves solid earnings growth in 2013 and beyond. As we announced in our November 5 press release, we are divesting our cyclical electronic assembly and test businesses. Our SEC filing last Thursday put these companies in discontinued operations. These businesses were about 30% of our revenue, 20% of our profits and a very high degree of the segment’s volatility.
You can now see our roughly $1 billion of sales that are focused on the more steady, broad, global, fast moving consumer goods, FMCG and industrial markets. The three businesses, market Markem-Imaje, which I will talk more about during the presentation; Datamax O'Neil, our industrial barcode system provider and OKi are all leaders in their field and will deliver consistent growth and improve profitability.
Just to give you a little bit more history and detail on why we are excited about the new DPI, here are some points. Firstly the organic growth has been 6% over the last three years. Much of that growth is delivered from the attractive and consistent underlying markets, with new products and other initiatives starting to contribute more in 2012. 2012 certainly heads the market headwinds for us, but we are still growing at almost 4% in the year excluding FX.
We also continue to invest in new growth initiatives, yet recognize the need for some structural changes in our business, which were auctioned in the first half of 2012. Without the first half costs, our margins would have been a 100 basis points better and yes normally the second half is up between 100 and 200 basis points due to our volume and mix. If you consider all that, it shows more than a 100 basis points performance improvement and we are seeing that positive momentum continue into 2013 particularly in Markem-Imaje.
Geographically, we are still the most globally diverse segment within Dover. However, somewhat overweighed to Europe which has been a challenging issue. That said our growth is balancing our geographic mix by increasing particularly in the developing markets. I should also mention that North America has been growing well this year and continues to hold more opportunities for our businesses.
Matching this growth with talent development is very important if we want the growth to be sustainable. In my segment, we have a global mobility KPI. Year-to-date, we have more than 11 cross-country management moves. One example, the Markem-Imaje CIJ marketing manager, who has got a multi-year assignment in China, not only will that help him develop, but that way, he will really understand the requirements of the customers in that very important market.
When I started a year ago in this position, I had an internal goal to have our recurring revenues and meet 60% of sales. While now with the new DPI, you can see we're very close to that target. The very virtuous cycle with customers and our business benefits go hand-in-hand. It also shows the importance of our investments we made in expanding our large installed base.
When I say large installed base, I mean we have almost 1.5 million industrial printers and other systems from these three companies installed around the world. We're constantly working to ensure that every unit is running well, consuming materials and that helps our customers continue to produce in their plans.
Dover has shared the tailwind to position our businesses for growth, and here at the DPI I specifically. Sustainability shows up in many new environmentally friendly substrates that we need to ensure our printing solutions work with. That means, matching ink solutions and doing exposure and durability tests of the final print product.
Consumer product safety continues to become pervasive. More information, more codes, more tracking, all resulting in a constant stream of new applications for our business. One example is a new law in Europe that requires all individual cold desserts, read ice cream cups and popsicles need to be marked individually rather than just the case markings of today.
I have said DPI is the most globally diverse segment in Dover, yet we still have significant growth opportunities in developing markets. Even with the slight slowing in China, the opportunities are still very exciting and additive to our overall growth rates.
Now to some more specifics about our end markets. Fast Moving Consumer Goods, FMCG is our biggest market and our biggest focus area. We believe there is $3.5 billion of economic activity available to us with a long-term growth rate of 3% to 4%. As noted in our last slide, food safety regs continue to increase and the marking and coding opportunities follow. Also beverage is growing faster than food, and we have some great new products here that we will talk about in a few slides.
Industrial is a $3.3 billion market growing a bit faster, thanks to the more complicated and far flung global supply chains that require instantaneous and accurate tracking. With the holidays approaching just think about the millions of customers checking tracking numbers to ensure their presents get there by that special day.
Our businesses help the logistics company ensure they have accurate labels and get those products there on time in these markets. The growth rate in developing economies for both of these markets is double the global average. Each of the segments is going to drill down into a business or two, and I am going to focus on Markem-Imaje obviously.
Markem-Imaje serves the marking and coding market, which itself is about $4 billion market, with very high recurring revenue and great margins. The story is the same, developing economies, growing, rising standard or living, increased regulation and other macro growth mobile players. We know these markets and we love serving them.
Markem-Imaje today is becoming a stronger player in this space. We are a leader because we meet the demanding need to the market. Customers want a full range of products, a full solution of printers and consumables and services which we have. Customers want constant technology development to keep up with their needs, which we deliver to our large engineering team and our technology centers around the world.
Customers want you to be local for them, a service solving their local issues and being there to keep their lines running and their businesses growing, which we deliver to our customer intimate model and direct presences in more than 30 countries. We do all these things and we do them well, that's what makes us a leader in this space.
When we formed the segment a year ago, my first priority was to ensure that MI had a clear focus, and this slide to picks the areas we chose. First we needed to invest in our customers facing resources in high growth areas, we dub this the BUIC plan, Brazil, US, India and China, that's our BUIC plan and our biggest focus.
The product portfolio needed to be refreshed. We moved from what I call a box spec design methodology to a voice of the customer design methodology. We focused on areas that customers valued like uptime and better operator interfaces.
The second important difference in the product development side is we are fully committed to product platforms; we’re rolling out several right now and I know from my experience that these will improve margins over time.
Finally, I knew we needed to get leaner and more responsive especially for the developing markets. The biggest element here is to empower local decision making and reduce the delays inherent in the centralized organization. I am happy to say that the team at Markem-Imaje is doing a great job moving forward in these areas so let me share a few details.
As for customers facing resources we've invested in those BUIC countries, Brazil, US, India, China. We've increased people resources there by 20%. This is an investment which you can also see from the chart on the right; we are changing the mix of our global resources to match the opportunity. That helps pay in part for the people investments we are making. Also in certain large developing economies we determine we needed to augment our direct channel with an indirect distributor channel. We launched this for China in Q1 of 2012 and today we have more than 20 distributors there and have sold hundreds of units through this channel. We will replicate that success in other key developing markets in the years ahead.
We talk about new customer acquisitions in the BUIC countries which is certainly gone up. One 2012 examples in the important Chinese market is Mengniu which translated literally means Mongolian cow and I'm not kidding about that. This maybe the largest dairy company you've never heard of; it’s the largest dairy company in China and a very important customer of ours. Our 9232 CIJ printer total cost of ownership feature, our local support, our ability to tailor ink solutions to their local substrates and the environmental requirements help us convert this important customer.
We talked about customers wanting full lines and products, well, I'm happy to say not only does MI have a full line but after the last 18 months of work we’ve introduced a fully refreshed product portfolio. Continuous inkjet CIJ is the main stay and we’re stronger here than we've been in a while. Laser saw a major announcement in this November at PACK EXPO in Chicago and the (inaudible) show in Europe. There we announced the brand new product family, the smart C Series family. Finally, thermal transfer, TTO; we have a leading position here and we continue to grow that.
So last year at Dover Day I spoke about the new 9232 CIJ product which was our first printer in this new family. It’s the mainstream offering. Since that time, we've introduced three additional products based on that platform. Together these address about 80% of all CIJ applications. Again, this product platform has mutual benefit for our customers and for Markem-Imaje.
That said about product platforms these transitions take time, as customers continue to have product line expansions where they want existing equipment to be replicated. We continue to see growth in this new product over the years.
One variant in our 9232 CIJ family expands our opportunity into the high-speed beverage market. This is a niche that we had not had a strong offering in the past. We use voice of the customer to ensure we match the unmet needs and we think we have a great offering here. We not only spoke to global beverage firms who desired better cost of ownership and up-time but to integrators like Cronos and Cidel, who are happy that our offerings match their newest high speed lines and integrate very well for that.
Lasers are part of the market that’s been growing well for a number of years and we are really excited about our new offering here. We introduced this at the trade shows in November and we showed a 30-watt version and a 10-watt version of this family which together cover a large portion of the marketing and coding laser opportunities. Again the voice of the customer development methodology was used. We focused on up-time, and needs of integration. These products will start shipping in the early 2013 and should enhance not only our revenues as they are leading products but also our margins.
So again, it’s the developing economy story, but here focused solely on Markem-Imaje. And last year’s strategy worked for MI, this was part of a data that showed how important developing economies are; 76% of all the global packaging growth through 2015 is coming from BRIC and other emerging economies. These facts were a basis for our need to change MI's organizational structure to become more responsive to the opportunities that we saw in the developing economies.
We all know organizational structures matter and moving MI from a central decision making structure to six regional business units will certainly improve our responses to these customers. Regional business units will have responsibilities for sales, service, operations and some level of product customization which is what we need to satisfy the nuances of developing economy customers.
Note the emphasis on growth regions, BUIC, Brazil, U.S. India, China and ASPAC being five of the six regions. We are also investing in infrastructure in these regions. Last month we did the groundbreaking foreign expansion of Markem-Imaje’s China production facility. This doubling of capacity will improve our ability to meet the growing sales in that region. In Brazil, we also added supply chain resources in Q3 which will help expand our localization efforts. Also you should note that in 2013 we are moving Markem-Imaje’s headquarters from France to Switzerland, which is a better location for MI’s global leadership that focus on growth markets.
So yes, we have made a lot of changes, but I am confident that these moves are the right moves to make MI successful in the long run. It’s a very attractive market and we are a leader. We have made investments in these last two years in the customer facing resources, in refreshing our product portfolio and developing a more customer responsive organization.
The momentum at MI is showing and just to share some good news, our November bookings were the best of the year and the bookings this quarter are on pace to be an all time record. Let me say that again, our bookings this quarter are on pace to an all time record. So considering the European headwinds we are still facing, I think this helps prove that we are getting traction from our initiatives and it will continue in ‘13 and beyond.
Markem-Imaje is a great example of an integrated solution company that has high barriers-to-entry and it’s highly rewarded for the significant value it adds to a customer. When I look at how this value is added, it’s an integrated approach that I capture here in these five bubbles. Every one of them has to be in place and everyone has to be working well to achieve success.
Application knowledge firstly, like OK International knowing the proper dispensing valve to apply to some obscured ease with low viscosity. Global sales and service, like Markem-Imaje having direct presence in over 30 countries; material knowledge in local supply like Markem-Imaje knowing how to match an ink formula with a new substrate from China and locally supply that ink.
Software interfaces like Datamax-O'Neil knowing how to interface with a new ERP system so that customer can print labels across their multiple warehouses around the world. Integrated machine design, like all of our business is using mechanical, electrical, and chemical and software skills to come up with globally competitive platforms that we can produce in our facilities around the world. Again, everyone needs to be in place and having them create significant barriers-to-entry to players that have less, that are less involved or players that have less scale; it becomes very hard to match our capabilities.
In these strong integrated solution models, they generate significant recurring revenues which we have been growing through the years. This percentage is the balance, while we continue to build the installed based. We are doing both; yet considering the economic uncertainty that we are facing going into 2013. We've focused on our continuing initiative to further our consumable capture rate in 2013 which will help insulate us from further uncertainties there.
Productivity comes in many forms and we are working them all. The DPI team will deliver approximately $20 million in improvements for this year. Restructuring, savings and improved efficiencies through lean have been a major contributor to our productivity this year.
We saw some of these changes mentioned in my Markem-Imaje detail earlier but it’s true across our whole segment. On the sourcing side, we are leveraging both the segment resource, the Dover resource and the regional resources to improve our best cost country content level that shows up in our products.
With DPI’s global footprint, logistics is critical for our businesses. Our segment is leading a UPS white board mapping initiative to do a ground up review of supply locations, demand locations, hubs, transportation laying and service level requirements.
I expect this project to yield better lead times for customers, better inventory position for us and lower freight costs. Finally, shared facilities continue to happen with the next one scheduled for Asia in 2013 and there will be more to come.
Sourcing across the company is working hard on a range of the initiatives and they will help our segment and others. The new Dover sourcing data system and middleware, and software called Bravo is really starting to help us identify the next priority commodity groups and suppliers that we can go after for cost savings.
I've spoke in the last slide about logistics that would probably to be our largest implementation project for 2013. And if you consider it’s not just the systems but the daily and weekly consumables that we shipped to our customers around the world there should be some real dollars here.
The productivity project that's win-win for customers in Dover is the repair center work that we are doing. This is moving from a more centralized repair model where many times the repair center is in another region, so multiple repair centers sometimes in third-party logistics hubs or sometimes with local product partners.
Service levels go up and cost come down. Datamax and O'Neil implemented this change for Europe in 2013; Q3, 2013 is already seeing happier customers specifically turnaround times have been reduced by two days that’s 20% for our customers. And the mutual win is our cost per repair is coming down as well.
So let’s turn to some numbers now. Our two main markets are growing in 2013 slower than the long-term trend rates due to the European headwinds that we’ve talked about and to some extend the slower China market. The FMCG market is growing at an estimated 2% next year which is linked to the GDP growth rates and tied to the geographic mix of our business.
The industrial market is growing at 3% in 2013 linked through industrial productions. In both cases we are working a range of other initiatives like some we’ve discussed earlier the CIJ initiative and many other smaller initiatives that support our results.
For our market participation, fast moving consumer goods, FMCG is the larger market and we have a higher share there. We also grew faster in FMCG for 2012, despite the headwinds coming from Europe.
This comes from our investments in customer facing resources and new products. For industrial, the headwinds coming from China and from Europe resulted in flat revenue with prior year.
Looking ahead now to 2013, there are a number of macro and market uncertainty that we are facing. Yet, we expect to grow faster than the market as a results of the investments we made to-date and they’ve positioned us well.
Margin wise, we expect expansion. However, this also balances the product mix between continuing to sell systems and build our installed base and the higher margin recurring revenues that we get from that installed base. Also we will benefit from some structural savings and productivity initiatives that we had started this year in 2012.
We talk about organic growth and besides that, we've been focused, which has been our focus in the past year, Dover intends to deploy more capital in the DPI segment. Last year, I showed you this map of the DPI market space and in this space where I am hunting for the right deals.
I am looking at deals covering printing in the fast moving consumer goods in industrial markets, across all of the application areas, deals that help compliment our base technology and businesses that would help us deploy our solutions in new geographies or through new channels.
We've not closed the deal in 2012. However, I can tell you we reviewed a lot. And so we expect in the year ahead, some fruit will be born from this effort and also from our ongoing efforts in this area.
So in summary, we are growing particularly in the fast moving consumer goods in the developing markets. We are focused squarely on printing core and adjacent spaces.
Marking and coding is the biggest space where we see lots of growth ahead and we have talked about the new products and customer facing resources that drives our installed base and that helps us grow our recurring revenue. We see acquisition growth in both our printing core and adjacencies results happening in 2013.
Finally, we are getting leverage from within the segment and driving productivity which continues to help our margins. Together that will mean that we are going to organically grow DPI 3% to 5% over the next three years. DPI has the momentum and the commitment to do this.
Today, my objectors would have described the new DPI a more consistent, a more focused and a higher profitability segment and secondly to describe how DPI achieved solid earnings growth in 2013 and beyond, that story should be clear and I am looking forward to talking to you later and in the year ahead about the progress we are making.
Thank you and next up Tom Giacomini from Dover Engineered Systems.
Good afternoon. I have got the tough shift right after lunch here you guys are all settling in. Thank you, John. I am delighted to have the opportunity to share our growth strategy, results and plans for 2013 at Engineered Systems. So, all of you thank you for joining us today as well. We got a great story to tell, so let's get started.
Dover Engineered Systems comprises just over 40% of Dover’s 2012 revenue. I am very fortunate to lead two of Dover’s five strategic growth space, fluids and refrigeration and food equipment.
The 2012, we expect to end the year with our growth space revenue comprising fully 54% of our sales, an increase of 200 basis points over 2011. This increase has been driven by both strong organic growth initiatives and our acquisitions completed in 2012.
We have achieved record results year-to-date in 2012, driven by the strategy and actions I have described to you in preceding Dover days. As we entered the third quarter, year-over-year our sales have increased 10% and our earnings 14%.
In addition, our operational excellence initiatives have allowed us to continue our year-over-year margin expansions into 2012 with margins increasing 50 basis points to Q3 in 2012 and year-to-date operating cash flow increasing 30%.
Our segment has many well known brands that are leaders in their market places. With respect to our portfolio, we have added two market leading brands through acquisitions in 2012.
In our fluids space, we completed the acquisition of Maag in March. It is the leading producer of gear pumps for the chemicals and plastics industries. Maag is a real long-term winner for Dover, expanding their positive displacement pump portfolio and increasing our fluids exposure to faster emerging economies. I'm extremely pleased to share with all of you that the Maag acquisition is exceeding our expectations for the year, driven by exceptional performance of our post-merger, integration team and the extensive PMI planning by our leadership that was completed prior to closing the deal.
In refrigeration and fluid equipment, we just completed the acquisition of Anthony. Frankly speaking, December 1 was truly a better day from our leadership team as we completed the purchase of Anthony. This is a tremendously strategic field for Dover that we've been tracking closely for many years. We will talk in much greater detail about the value creation that will accrue to Dover through the acquisition a little bit further in my presentation so stay tuned.
As you will see on the chart on the left, just under 70% of our sales are derived from North America. This has certainly been a benefit to us in 2012, given the challenges in Europe. We have really accelerated our investments in China, India and Brazil over the last few years with increased sales, engineering and operating capabilities.
Our fluids businesses will continue to enjoy double-digit growth in these markets, based on improved position, and very strong market fundamentals. Many companies see increasing labor costs and emerging economies as a challenge, but for us it’s a great opportunity for increased sales due to our labor reducing automated products that also improve quality and safety.
Our planned emerging markets growth in 2013 for this segment is 9%. We expect a solid growth trend to continue for the foreseeable future, as we continue to leverage our efforts in these markets. New products are the life blood of engineered systems, given my background as an engineer; this is an area I'm particularly passionate about.
Our investments in engineering and new product development tools made over the last two years are really paying off, with the steady stream of new products focused on energy efficiency and productivity driving lowest total cost of ownership. It certainly makes our sales costs much more effective when our sales people can offer products that approves a customer’s bottom line.
As a result, our revenue from new products will double to 5% of sales in 2013, with improved gross margins as we capture a portion of that value creation for our customers. Our product mix is breakdown to highlight recurring revenues. Our recurring revenue has grown at a 17% compounded annual growth rate over the last three years; as we have really begun to focus on this important area.
By working more closely with our customers and our channels to further capture this opportunity, we see a path forward to not only drive increased sales but to also enhance our margins, particularly with respect to our product offering. Our new products now have enhanced patented or proprietary elements that further secure our ability to drive recurring revenues stemming from service and maintenance.
Our segment is organized in to two platforms. The fluids platforms delivered $800 million in annual revenue and focuses on pumps, heat exchangers and dispensing equipment. The refrigeration industrial platform totals over $2.6 billion in sales and consist primarily of refrigeration and food equipment, but also waste and recycling and automation.
You’ve seen before the macroeconomic tailwinds that Dover has identified as growth drivers for increased capital allocation. At Engineered Systems, we enjoyed broad exposure to four of these tailwinds, and particularly, both of our platforms are well positioned to benefit from increased customer activity in the areas of sustainability. We're increasingly energy efficient product, coupled with an oversized opportunity to drive the emerging market growth in our enhanced global, operating footprint.
Engineered Systems is a global player in the pump heat exchanger and chemical dispensing markets. We had strong participation through our positive displacement pump portfolio, rate pre-heat exchanger and dispensing businesses, as global participation has really been further enhanced through the acquisition of Maag. The chart on the right and all subsequent CAGR charts, I will share you show strong organic growth, complimented by acquisitions.
In this case, fluid solutions CAGR is over 12%. Globalization and new products have been key drivers supporting this above market performance. The pump [forward] market growth rate of 46% is driven by fundamental market demand and to a smaller extent conversions from other less efficient pump technologies.
Brazed plate heat exchanger growth on the other hand is driven primarily by conversion from less, cost effective plate and tube products and then secondarily by the markets. This conversion drives a strong 6% to 8% growth rate and we foresee this trend continuing for many years as we continue to enhance our product range and the capability to the business.
Overall, the food markets delivered consistent growth, because underlying demand driven by macroeconomic factors including chemical and energy demand, infrastructure expansion, water, food and pharmaceutical usage. Our strategy for fluids consists of three primary elements; first, we see growth opportunities in our vertical and markets by driving alliances with key multinational customers across all of their geographic locations, with their comprehensive portfolio of products and our global operating footprint.
One key element of this strategy that we have really used to great effect is to identifying opportunity with alliance customer at one facility and then communicate this opportunity across our global sales force to close the sale across the same customer at all of their locations. Second, we continue to leverage our strong North American and European technical and product position in to emerging market with more energy, chemical, food and pharma industry activity ships to China, India, Brazil and the Middle East.
To drive this strategy, we have place local sales, engineering and production facilities in China, India, Brazil, along with Eastern Europe, South East Asia and Middle East. Finally, many opportunities exist to further enhance our portfolio through acquisitions within the positive displacement pump and associate component space.
A good example of value creation is Maag; this acquisition enhanced the richness of our product offering and global capabilities, while also delivering meaningful extensions to our third markets and our customer base. Here is the strategy from our previous page coming together to create value for the customer, in this case Dow Chemicals.
Dow is an alliance customers in the chemicals vertical that we are focused on supporting globally. As Dow communicates to us their desire to decrease compressed air consumption in their facilities 15% globally, we saw great opportunity to help them when we are energy efficiency driven new product development.
Our new welding pump [ABS] system reduces the use of compressed air by 30%, doubling the desired reduction of air usage requested by Dow. Let’s take a look at the global retail refrigeration markets. For Engineered Systems we participate in above $4 billion of this market. The sizes of our served market is increased the acquisition of Anthony, which also opens a convenient store refrigeration market with its leading position. For the long term, we expect this market to grow in a 2% to 3% range as new store constructions starts to improve with housing, but are planning for 1% to 2% rate in 2013.
Overall, the new store construction count continues to be low, but remodels remain strong. In fact while the split of new versus remodeled used to be 60-40 in favor of new construction, the numbers have now flipped in favor of remodels driving 70% of the market. Additionally, a clear shift has occurred to more refrigerated and prepared food offerings in grocery stores. This shift has increased revenue per store for us to capture as we have expanded our offerings organically and through the recent Parker acquisition. Retailers are also increasing their investments in energy efficient and environmentally friendly refrigerants driving increased activity in the marketplace for us.
Close the case, as retailers put doors on traditionally open medium temp cases to lower energy costs is a tailwind increasing both new case revenue and retrofit applications for us through the acquisition of Anthony. As shown on the right of the page, our Hillphoenix refrigeration business has delivered an 11.5% compounded annual growth rate over the last 10 years. Our continued gains in the marketplace, along with expanded and energy efficient product offerings have this supported above market growth rate.
Another strength of this business I would like to point out is its low volatility demonstrated by performance through the last recession. We expect this strength to continue in the future as retailers will continue to invest in improving their stores even in tougher economic times given the extremely competitive nature of their business model. Time-and-time again as one retailer remodels a store in a local geography we typically see the competitors following suite to avoid compression in the same store sale.
Let's take a few minutes to review the Anthony acquisition. Anthony is the world’s leading supplier of refrigerated door systems, specialty curve glass, LED lighting and case re-skinning for their retail, grocery and convenient store markets. Anthony is a global supplier with operations in the United States, Europe and China. For 2012, Anthony will generate approximately $300 million in revenue with higher margins than our existing refrigeration business.
As you can see from the illustration, it is very important to note that Anthony is critical to the consumer interaction in the retail refrigerated marketplace. Their class leading energy efficient door systems and LED lighting systems are positioned to deliver the optimal consumer experience maximizing sales for the retailer. With respect to the door systems there is a tremendous amount of proprietary technology that has been developed by Anthony to deliver fog-free low energy doors that have maximized openings delivering exceptional merchandising to the retailer. This capability includes proprietary design and process technology that secures their position in the marketplace. This technology has been more recently complemented with LED lighting that has the same value proposition, improved merchandizing and lower energy consumption.
The Anthony value proposition is in complete alignment with the same strategy we have been using for great success in our refrigeration business for many years. Better yet, the total value proposition can be further improved when both companies are brought together to deliver an optimized refrigeration case, such as our new PureView system.
In addition to significant cost synergies, this slide details the four key value drivers for the Anthony acquisition. First, our refrigeration business will now be able to deliver for the first time complete energy and merchandizing optimized systems to the retailer provided entirely by Dover.
Secondly, Anthony positions us in a leadership role to take full advantage of the rapidly developing opportunity close to medium temperature cases for retailers. We will cover this exciting opportunity further on the next slide.
Third, Anthony enjoys a very strong position in the $800 million annual convenient store marketplace. Historically, we have had very limited participation in this marketplace. Anthony’s leadership position with convenient store retailers will allow us to pull through our refrigeration and walk-in cooler products into this new marketplace for us.
Last, Anthony’s global footprint with operations in China, Europe and a JV in South Africa creates a strong foothold for us to accelerate the rollout of our refrigeration products via existing Anthony customer relationships in these new geographies. As you can see, having Anthony in Dover really opens up the field for us with respect to future growth.
I would also like to share with you that we have a pride at unprecedented level of resources to the PMI process in advance of this acquisition and our teams were well prepared to begin full deployment on these initiatives from the day we closed this deal.
With respect to growth, Anthony has delivered a strong 12% compounded annual revenue growth rate for the last 10 years. The Anthony business is also very resilient to recessionary pressures and is a real benefit to Dover for these reasons.
Now, a short video demonstrating the ‘close-the-case’ opportunity.
So now you know what we mean by 'close-the-case', right. Closing the case represents a significant market expansion opportunity for our refrigeration business has historically the large majority of medium temperature cases utilized by retailers do not have doors due to historic preference to create open merchandising experience for consumers.
Medium temp cases is typically are used in the deli section. As we've mentioned in the past, electricity is the second highest operating cost of the grocer after labor. The single largest go forward opportunity to reduce electrical consumption in the retail environment is closing medium temp cases with doors.
For those of you such as me sufficiently matured to remember when frozen food cases were also opened, you could appreciate how closing cases improves the retail experience. Before the advent of low temperature glass doors, a walk down the frozen food aisle a retailer was like an arctic expedition.
Its cold air spilled out of the cases cooling the aisle dramatically while at the same time consuming significant amounts of excess electricity. Retailers warmed to the idea of closing the cases with doors even giving merchandizing concerns to ultimately enhance the retail experience while at the same time significantly lowering their energy costs.
As you are all well aware, almost all low temp cases are now closed with doors and the trip down the frozen food aisle has become a much more favorable experience. Our research indicates that this same dynamic is now applied out globally with respect to medium temp cases.
The economic benefits are compelling up to a 60% reduction in energy consumption coupled with a payback period of less than two years. In the case of warm retailer, Anthony partnered with on a 20-store test the payback period on the investment was much closer to one year.
In addition, regulatory pressures are accelerating this conversion in many geographies as regulators look to lower the carbon footprint of retailers or maybe more importantly to reduce net electricity consumption in areas that struggle with insufficient electricity supply.
Increasing food safety regulations also drives ‘close-the-case’ conversion. When you pull it all together, it is our expectation that closing the case will provide over $2.5 billion of incremental sales opportunity to Dover over the next 10 years.
Dover is now in a leadership position with unequaled capabilities to seize this exciting opportunity. As we look forward with our collective refrigeration business inclusive of Anthony, our strategic position continues to strengthen.
We intend to continue to enhance our energy leadership position in both systems and cases allowing us to drive value for our customers and improve margins. Our continued development of CO2 systems for North America, coupled with improving penetration in Europe will yield $50 million of sales in 2013, an increase of over 30%.
Importantly, we just received regulatory approval in the US from underwriters’ laboratory. For the CO2 technology, by just I mean just last week, for the CO2 technology that has been successful with European retailers that we acquired with Advansor.
We have identified numerous opportunities to further Anthony sales with our existing customers and are working to secure these opportunities as we seek. Our historic operating footprint for the refrigeration business has been limited to the United States. Although, we did gain a small foothold in Europe via our acquisition of Advansor. Anthony furthers our position in Europe and brings with it an operation in China that also serves Southeast Asia and a JV in South Africa.
In addition, Anthony has made significant strides in Brazil commercially that will further our efforts in South America. Acceleration of 'close-the-case' with plans almost doubled sales in 2013 as we opened the playing field for Anthony with our extensive customer base and service network.
Central and South America with the plan 2013 sales of $70 million in our core refrigeration business remains a double-digit growth market for us. Our strong presence in Mexico has expanded now to Costa Rica, the existing customer relationships and Anthony helps to facilitate further progress in Brazil.
On the acquisition front, we're developing a number of promising acquisition opportunities for our refrigeration business in emerging markets as we look beyond Anthony.
If you attended our Technology Day earlier this year, I recognize a number of familiar faces from that, we had a display of our new PureView case system that delivers a 30% energy savings to retailers while also providing improved merchandizing.
Our display includes the existing case technology and the difference between the two was stunning. PureView is IP protected technology that will provide us a significant competitive advantage while also helping our customers win with lower costs and improved sales potentially. This technology works on both low and medium-term cases although the benefits are larger on low temp cases in this situation. It is encouraging and interesting to note that this technology incorporates the best that Dover and Anthony has to offer and we work together jointly to develop this process before we had begun the deal process with Anthony.
This slide speaks to the benefits of the PureView system from a customer perspective. Based on our testing, the PureView offers a 30% lower operating costs versus the best competing system. The engineering required to deliver this benefit was extensive encompassed all elements of the case. It was not an easy task to achieve the 30% energy improvement considering the significant progress we had made in the last 10 years on case efficiency.
From a customer perspective, the system will save the operator approximately $10,000 a year over the next best offerings based on our 135 low temp door openings. This benefit allows a customer to enjoy a five-year paid back on the PureView while also improving merchandizing.
Most importantly, based on public information, this investment will yield a 2% to 3% improvement in operating profits for the grocery store which is huge. We are considering the same margins many retailers enjoyed.
My leadership team is passionate about constantly improving our operations as we hold a strong belief that the best way to win in the marketplace and with our team members is through safety, quality, delivery and productivity.
The total benefit to Engineered Systems is over $50 million in 2012. On the Lean front, we delivered [$16 million] of savings in labor and overhead in 2012 and drove the improved cash flow performance discussed at the opening of my presentation.
In addition, Lean continues drivability to short lead times and improved customer satisfaction. As the largest consumer of purchased materials in Dover, our segment continues to enjoy the benefits with Dover’s supply chain team.
In 2012, this benefit is over a $25 million of savings, supporting share the breadth of activities that we have underway to drive continuing improvement across our business. At the segment level, we provide a comprehensive set of tools and training to our leadership team and track our progress monthly against aggressive goals to delivery these results it is literally a battle of inches where annually thousands of improvements are implemented in our products, facilities and with our suppliers. On the labor and overhead front, our activity includes lean facility and product line rationalization and automation.
In 2012, our expanded margins included costs to rationalize facilities and product lines, coupled with investments in automation that provide a confident path to expanded margins in 2013. With respect to materials, we are expecting the benefits from actions planned and completed in 2012 to provide a continuing tailwind into 2013.
As our operating footprint has expanded into emerging economies to capture sales, we've also localized production and suppliers to benefit both in country sales and to facilitate a lower cost production base to supply our existing customers in the US and Europe.
Let's spend a few minutes discussing expected market dynamics from my portfolio in 2013. For refrigeration and food equipment, markets will grow 1% to 2%, driven primarily by store remodeling and menu expansions in quick service restaurants. We have secured commitments from key customers that will provide for our continued share gains. Our new energy efficient product offering coupled with the Anthony acquisition will provide further upside to the base market growth rate in 2013 and beyond.
With respect to our fluids business, solid market growth of 4% to 5% will develop in 2013, and as investment in chemicals, energy and plastics production deployed by natural gas in the US and continuing infrastructure investments in developing economies rounds out the rest of the world. Our industrial businesses will continue to be solid contributors with 1% to 2% market growth, driven by new products that enhance the productivity of our customers and our increased geographic footprint.
Taking a look at 2012, I'm very pleased with our revenue growth rate of 10%. We have delivered enhanced growth above market rates in many areas through new product developments, geographic expansions, acquisitions and operational excellence, coupling the [pure] share gains and margin enhancements. As we look to 2013, the organic growth rate moderates a bit, but I'm confident we will deliver strong 10% to 12% top line growth, and through our operational excellence programs and pricing we have all of the elements in place to deliver further margin expansion.
In closing, Engineered Systems is driving strong growth by securing our [wrath] of improving opportunities in a developing economy. New product development that is focused on helping our customer win through energy efficiency and productivity will drive our continued share gains. We continue to manage our portfolio and have completed actions to reduce our exposure to margin challenged or cyclical product offering in addition to continuing to reduce our costs of doing business through facility rationalization and [length].
We see further acquisition opportunities in the growth areas of fluids and refrigeration of food equipments, expanding our product offerings and geographic capabilities as we did with Maag and Anthony. Our operational excellence program is yielding strong results with productivity initiatives continue to expand margin in to 2013.
Putting it all together, I am committed to a solid compounded, annual revenue growth rate of 5% to 7% over the next few years. With that, we now have a short break and we will start back with Bill Spurgeon and the energy segment. Thank you.
Good afternoon. I am happy to have this opportunity to tell you about the Dover Energy segment today. I will say a few words on our 2012 performance and spend most of my time dealing how we plan to achieve growth in the years ahead and specifically in 2013. There are three main points I would like you take away from this presentation.
First, we will outperform the market. Second, our focus is on driving growth in our production and downstream sectors. And third, we will continue to expand internationally. Let me give you a quick update on Dover Energy’s 2012 results. We had another strong year and expect to set records in bookings, sales, earnings and earnings margins. We expect to grow 16%, 10% organic, and 6% through acquisitions and expect increased cash flow of 25% over 2011.
Our segment is now 27% of Dover’s total revenue and 37% of earnings in 2012. I will talk about the business in three sectors drilling, production and downstream. Drilling at 19% of revenues includes drill bit inserts and down haul pressure transducers and are key drilling brands are US Synthetics and Quartzdyne.
Our largest sector is production; our key brands are Norris, Harbison Fischer, Tulsa Winch, and Cook Compression. In 2012 we added TCS integrating up with Ferguson Beauregard, which adds several key technologies to artificial lift offerings including gas lift and nitrogen generation. It also improves our automation offerings. And lastly our downstream sector provides critical fluid handlings and dispensing products as well as key bearing and filling solutions.
In this sector, our key brands are OPW Fueling Components, Waukesha Bearings and OPW Fluid Transfer Group. Let's take a look at where we are operate in the world. 80% of our business still originates in North America, with the remaining been spread evenly between Asia, Europe and other parts of the world.
While, North America remains our dominant geography due to the strong energy markets here, we continue to grow faster in developing economies with revenues doubling over the last three years. We expect this international growth to continue going forward as a result for the significant investments we have made in Latin America, the Middle East and China.
Looking at our product mix, our recurring revenue across the portfolio is on the rise. Over the last three years, it has grown to be 44% of our sales. We are finding once our products to installed, our customer stay with us due to our strong service and support. In addition, we have and will continue to make significant investments in to driving sustainable revenues, which we will discuss more throughout the presentation.
You have seen this chart before, so let's drive in the demand of our products. Let's take a look at the three macro trends that are involved. As global energy demand increases, extractions will move into tougher environments. Energy fields that are maturing and a majority are no longer free flowing so artificial lift is needed. Dover Energy is a leader in developing innovative technologies and improve these processes.
The second trend is sustainability. This trend involves increase in demand for efficient products and solutions that meet the ever growing regulations. We are increasingly finding that our customers request our products because they meet stricter regulations and improve their profitability by reducing costs.
Thirdly, the increasing demand for upgraded infrastructure worldwide creates a very favorable environment for Dover Energy in the years ahead. The improved standards of living coupled with more global urbanization drives demand for new infrastructure such as fueling stations and power plants. As you can see each of these drivers support all three sectors in the years to come.
The major drivers for our drilling and production sectors are demand and depletion. The chart on the right, address the increases in demand being driven by the emerging markets. You can see the growth needed in both conventional well as well as other forms of liquid fuels. But what really drives our business is depletion.
The chart shows that over the next 25 years world energy demand will continue to grow while the depletion rate accelerates. Existing production shown by blue will be reduced by two-thirds by 2035. The increased demand along with this reduction must be replaced. This will require increased drilling in harsher environments requiring artificial lift technologies that we provide. As a result of these drivers, significant investment is needed to maintain the existing production and meet future demand.
Let's take a look at each of our market sectors. In 2013 the drilling market looks flat, but the long term outlook remains strong. This growth will be produced by a few key drivers. First is what we discussed with accelerating depletion. Second will be the stability in international drilling which will offset some of the slowness in North America. In addition, the percentage of horizontal wells drilled remains high which is aligned better with our drilling product offering.
We are expecting continued growth in our production market driven by 5% growth in global exploration and production CapEx from 2012 to 2015; 70,000 new wells are to be drilled and completed next year consistent with this year and an increase of 10% over 2010; 94% of wells worldwide are already utilizing artificial lift and this number will continue to rise as international markets increase their use in lifting products.
Our downstream growth will be largely driven by emerging markets. However in the more developed countries, expanding regulations drive the need for the technologies we provide. Infrastructure will also be a part of the long-term growth. Significant capacity additions and power generation are expected through 2035 positively impacting our variants and sealing business.
Now let me show you what we have done in comparison to market growth. Not only are we having a strong 2012, but we have enjoyed a long history of great performance. Dover Energy has consistently outgrown our market indicators including doubling the North American rig count growth and significantly outpacing GDP. Much of this growth has been organic and even without acquisitions we have outgrown rig counts by 1.5 times.
Also, take note of the quick recovery after the economic downturn in 2009. Since that time, we have taken key actions to position ourselves to better weather another downturn and we will talk more about this throughout the presentation.
We have discussed our strong historical growth, but now I want to use the next portion of the presentation to demonstrate how we will grow in the future. We plan to grow through expanding our artificial lift business, continuing to grow globally, by introducing innovative products providing value to our customers, through operational excellence and continued acquisition efforts in our production and downstream sectors.
I will now talk about each of these key areas. Before I tell you how we plan to grow artificial lift in 2013, let me give you a brief history of how we created this business. We were in the artificial lift market back in 1955 with only our sucker rod business, one of Dover’s first four companies. Between that time and 2009 we had a numerous standalone products helping us to penetrate the market.
Then in 2009, we created a roadmap to intentionally develop our offering to help customers optimize solutions throughout the lifecycle of a well. This led to the creation of Norris Production Solutions in 2009. Since then we made numerous strategic additions to our artificial lift solutions including rod pumps, field service, PC pumps and drives, gas lift and nitrogen generation, each one giving us a more complete set of solutions to offer to our customers. Also we have listed some of the key actions we have taken resulting in sustainable profitable growth. I will talk more about these actions as I move through the presentation.
This chart shows the artificial lift space where we operate and displays the wide variety of solutions we offer for our customers lifting needs. As you can see, since last year we’ve added gas lift and nitrogen generation given us four of the five key lifting technologies. Heavy oil in Latin America and Canada are helping drive our PC pump system, while rod lift is widely used in North America and Canadian markets due to the high volume of lower producing wells. Plunger lift provides the unique solution for wells which are producing both liquid and gas. Gas lift, our newest addition, use of the plentiful gas available in wells to pull out liquids and the boom in the shale market is helping drive this system as well as our rod pump business.
We have chosen not to pursue electric submersible pumps to the large and well entrenched players in this market. We will continue to see opportunities and acquisitions that expand our technology, geographic footprint and that create value for our customers.
Why is artificial lifts such a large part of our growth plan in 2013? First of all, unconventional formations such as shale and heavy oil are creating the boom in the North American market. Clearly, that comes with a lot of opportunity for artificial lift, but not only in the Americas is that boom occurring. We are starting to see a lot of ageing wells around the world and artificial lift is going to play a big role in those regions.
In addition, our customers have expecting suppliers to provide a broad solution set which puts us in a strong position with our offering as demonstrated by the previous two slides. We believe we are well positioned with our technologies and our capabilities both in the North American market as well as around the world. Improving drilling efficiency is another reason why we’ll continue to grow. More advanced technologies are driving higher percentage of horizontal rig which allow for extraction of oil and gas in tougher environment.
As a result of the increase in these horizontal wells, drilling is becoming more efficient which is allowing each rig to drill more footage per year as illustrated in the graph to the right. Rigs are drilling at higher speeds, drilling multiple wells on a single path and generally becoming more efficient.
So why is that important to us? As rigs become more efficient, it provides an additional opportunity for growth in production even with slowing rig accounts. This is evidence by our revenue per rig growing by a (inaudible) of 12% since 2007.
Another key part of our strategy is our expansion into the artificial lift services business. First and foremost, I want to emphasize that we are not becoming a broad base service provider. Dover Energy is targeting services surrounding our core products including the installation and maintenance of Dover artificial lift systems and the associated technical support and engineering applications.
This is an attractive market for us for a couple of reasons. First, it gives us increased exposure to international markets. Second, it provides an opportunity for pull through of our other products as customers especially internationally are looking for a supplier with complete lifting solutions.
Service also drives significantly recurring revenues, giving us more consistent with growth through the cycle. Because we are expanding the artificial lift services market with the focus strategy on core products like pumps and drive systems, we are able to provide important benefits to our customers.
The Norris Production Solutions rapid surface rig you see up here is a great example of this. As you can see from this illustration, our rigs can reduce the capital cost of the rig by 50% or more. In addition, the RSRs that we call them decreased the crew size and set up time significantly which results in a much lower job rate.
Although, the RSR cannot perform all the activities of a full service rig when servicing the products we make, it is a big win for our customers. Most importantly, providing these services allow us to create strong customer relationships which help us to win future business.
Our second area of focus for growing the business in 2013 will be global expansion. We've grown at a 35% (inaudible) over the last three years outside of North America and Europe.
Newly acquired products and our entry into the services market has helped drive some of this growth. In 2013, we expect an additional 20% increase in production sector internationally. This growth will come from a few key areas.
First is the Middle East. Our coiled rod plant in Oman as well as our services business allow us to pull our other product line into the region. Also, as well as in the Middle East stage, the need for our products will continue to grow.
Latin America which is one of our fastest growing markets presents some exciting new opportunities. In Venezuela and Colombia, heavy oil is driving the need for our PC pumps and drive from the Oil Lift acquisition. Oil Lift has also allowed us to immediately penetrate the growing Australian market.
Let me tell you more about this opportunity. This is a perfect example how Dover has been able to leverage our size to help our companies win significant business. Oil Lift had strong product acceptance in the Australian region but was not a qualified bidder because of their scale.
After the acquisition, Oil Lift was able to leverage the size of Norris Production Solutions with third quality product to win the business. This success has also given us the opportunity to bring the whole product line into the market as we continue to develop relationships with the major players.
In addition to growing artificial lift and expanding globally, innovative products are going to be a strong growth driver for us in 2013, particularly in the downstream markets.
A great example of this is the Air Mizer from Inpro/Seal, a patent that Air Mizer is a sealing technology that provides significant benefits to the customer including reduced operating costs and increased product light when compared to the competition.
It was initially developed for the aftermarket for seal replacement but due to its success it is now being incorporated into OEM products. Here is another example of how our downstream sector is running for our customers with new and innovative products.
OPW has developed a below ground piping package for fuelling stations. The patents at plug-and-play technology makes installation and maintenance easy for the end user, eliminating the need for wielding and permanent piping, driving lower installation costs as well as lower costs of ownership.
In addition to these benefits, it also provides increased protection against leakage.
Continuous improvement projects will be another focus area in 2013. We have created a Lean enterprise team to help our companies improve processes and become more efficient.
Our record margins are evidence of excess in this area. Not only our Lean efforts reducing costs, lead time and improving quality; we are applying them to other areas of the business such as engineering allowing us to reduce our product development cycle time.
In our drilling business, we reduced new product development cycle time to under 10 days. Improving our back office processes, we have started initiative to move to one
By the end of next year, we will have 60% of our sales in the Oracle system including the majority of our international business. Our supply chain efforts had been a large part of productivity success this year.
We were able to reduce the number of metal suppliers from over 300 to 28 reducing complexity and achieving savings of 9%. Likewise, we have reduced the number of transportation carriers fivefold also with significant savings.
In addition, we have applied our supply chain initiatives to our acquisition integration process and we will see over $1 million in supply chain savings next year from one of our most recent acquisitions alone.
Overall, you can see that all of these activities will result in over $30 million of productivity improvements in 2012. As we look to drive further improvements, we will also invest in automation and plant consolidation. The increased used of automation will help us to drive reduce labor cost as well as improve product quality.
In our downstream sector, we have implemented an automated fueling nozzle line, which reduce labor cost by 75%. Additionally, a fueling nozzle can be made in 30 seconds, a 50% cycle time reduction.
Dover Energy has integrated and closed eight facilities in the last 24 months. Well over the same period, we have grown revenues over 65%. Our current projects will consolidate five plants from three operating companies under one roof. This is the first time in North America that we have consolidated different companies into one plan. This will provide a very attractive return on investment for us. In addition, we will continue to expand these efforts internationally, as two of our businesses move into our shared China facility, as well as one more into the plant in Brazil.
Overall our productivity improvements have helped contribute to margin expansion of over 400 basis points since 2007. We have talked about the roadmap we laid out to grow the artificial lift business. These acquisitions were a key part of following that plan and provide us the technologies and geographic presence to continue to grow our business.
Our acquisitions over the last 24 months will contribute 400 million in revenue in 2013. We will continue to have an appetite for acquisitions, particularly in-house production and downstream sectors. We currently are in due diligence on several add on acquisitions with the high likelihood that we could close on at least one before year end.
We've talked a lot about our strategy for growth in 2013 and beyond. Now I would like to break down that growth, it will be supported by individual market sectors. We see the overall drilling markets flat in 2013, but we will continue to invest in new product development as we leverage our expertise in diamond and quartz applications.
In the overall production market, we expect to see growth of 3%, but as discussed we expect to outpace the market through new product development, artificial lift services and further expansion in international market. We expect the overall downstream market to grow 4% to 5%. We expect our growth to be slightly above market, supported by our investments internationally as well as new product introduction.
After a strong 2012, with double digit growth, we expect 2013 growth of 5% to 7% with 2% of this due to acquisitions. Planned productivity improvements will allow us to maintain strong margins, while making investments in international growth and new product development. So putting it all together, Dover Energy is extremely well positioned moving forward.
We are in attractive markets with solid long-term outlook, and have the products and capabilities to capture the multiple opportunities in front of us. We will continue to outgrow our markets and make investments to grow globally. We have great people and strong processes that will allow us to build on our past successes.
Thank you very much. I would now like to introduce Jeff Niew, President of Dover Component Technologies.
Thanks a lot Bill. We have now heard a great story from the other segments, a story on how Dover continued to work to maximize potential in new ways through a focus on operational excellence and investment in new products. Now I want to tell you another great story. The story of Dover Communication Technologies.
Last year at Dover Day, we talked about how this segment was well positioned in strong markets with great products, with a strong and sustainable competitive advantage. While 2012, has proven again, we're making the right investments. And as we look in to 2013, we're bullish about our prospects. Let’s talk more about why.
While we are not the largest segment, we have potential for sustained growth in excess of GDP, as if we have done in the past and intend to do many years in to future. Consumer electronics, med tech, aerospace defense and telecom; our markets are very diversed and a source of core strengths. It has allowed us to begin to leverage products, technology and operational capability across the entire segment.
Our products are unique in the respective markets and in many cases, we are in either mission-critical applications where a failure is not an option or applications where our products make a difference in how people interface with the world around them. As you will see later, we are only beginning to realize the potential with our group to maximize sales and profitability.
With greater than 70% of DCT employees in emerging markets, I expect even more biz to come from places like China, by leveraging the existing DCT infrastructure. Our businesses in consumer electronics is highly invested globally and is well positioned to take advantage of the continued growth in those markets.
We are also making emerging market investments in the area of life sciences and aerospace; two growth markets that could provide plenty of runway in the future. In the area of new products we are proud of what we have accomplished, we continue to invest heavily in R&D, and the results are evident with approximately 30% of revenue coming from products introduced in the last three years we are the leader.
But as we look to the future, we can do more. Later you will see the pipeline that we have lined up for 2013 and our expectations for our new product sales will only grow. As we look beyond 2013, we are starting to see technology adjacencies across this segment, and while these are not guarantees it provides potential upside to our projections.
I will give you a little taste of this in subsequent slides, but needless to say, this is the only additive to our plans. The DCT tailwinds are primarily driven by two factors increasing communications I have discussed this before that our lives are forever changed by this. We are all constantly connected globally through voice communication; transfer of data and increasingly through video.
I have had the fortune to travel the world and see the change happening right in front of my eyes, children, seniors, people in China and India everyone carries a cell phone and uses it for many diverse applications. Globally users are demanding more bandwidth to support voice, data and internet usage. With all of this information and data is being transferred via fiber, routers, cellular networks, Bluetooth, Wi-Fi and it continues to grow exponentially there is no end of sight.
Second, every one of our businesses has an opportunity today and in the future for global expansion. In many cases we are just scratching the surface on these emerging markets as discussed. DCT Infrastructure capability for the consumer electronics market is providing us with an excellent opportunity to capitalize on this tail wind.
Now onto consumer electronics, the largest market in my segment. The combination of our MEMS microphone business, coupled with sound solutions has made us the recognized leader acoustic products to the smartphone market. Everyone has seen the [series] videos and how voice centric this app is, and I have firstly seen the shift as well. About 30% of the time, I send the text, I now used voice recognition to input my messages, this all requires premium audio both mics and speakers with mechanical and electrical integration.
This is our sweet spot. Premium performance and this is how our brand is recognized and this is where we consistently win. With Sounds Solution becoming fully integrated, we are now the leading acoustic supplier to the handset market. As you can see, we have transformed the Knowles business from a fledgling mic business in 2005 when Dover required to the global leader acoustics, in microphones speakers and receivers.
This position is only been made possible by operational excellence and execution. This has allowed us to benefit from scales and garnered large productivity gains. We expect this to continue in the future. It also allowed us to continue to increase our investment back into our business specifically in new products.
As you can see, we have been working hard to increase our R&D investments. There is no lack of demand from our end markets for new innovative products; in fact they are craving it. As the global leader we have an excellent track record of new product introductions, but we want to accelerate new product introductions as our pipeline is full of ideas warranting this continued increase of R&D spending. In order to achieve our goals, geographic expansion of R&D activities must also continue. Five years ago, we had only limited R&D outside of the US. Today, we have it in the US, Europe and Asia. One of our biggest challenges is adding engineering talent and this global expansion helps us to achieve our goals. We need the best engineering talent not just in North America but globally.
We also need to expand beyond evolutionary to revolutionary R&D even potentially core research. I will show you more later in this presentation, but this is about becoming an acoustic solution provider by integrating microphone technology, speaker technology, mechanical integration capability and using integrated circuit technology to add intelligence to our products. These are solutions that will allow our customers to provide their customers a better audio experience.
So what are the fruits of our investments and efforts? Knowles and Sound Solutions are setting the standards in the marketplace. We work very closely with our OEM customers to understand what they require and this is defined by their end applications. Once we understand what they want from their next generation products, we are able to design our new products to meet or exceed their expectations and while we expect our customers to need second sources we have the broadest portfolio of products including analogue or digital, small sized, multiple port configurations and the highest performance.
Today, we control all audio input and output devices in the phone and customers understand the value of this broad portfolio; one partner that can solve all their acoustic needs. Tomorrow looks even brighter as we are working to integrate all our capabilities to be able to solve any existing problem the end consumer may have. This opportunity is extremely exciting.
Now let's take a deeper look at our Consumer Electronics business. To do that, I would like to go through the following topics. First, we will discuss the markets; smartphones, laptops and tablets and the customers we deal with. Then we will discuss the new products that will be impactful to 2013 and why they are differentiated. After that I would like to discuss how we are using our extensive Asian manufacturing infrastructure to translate productivity and operational excellence across the segment. I also want to give you an update on Sound Solutions and then close out with some more detail on our system solutions approach to the market.
Let's go to the next slide. While we participate in the entire handset market the majority of our business is in the feature phone and smartphone segments. To go a step further, we are particularly focused in the smartphone market where OEMs and especially the consumers value the benefits of our product. As in any market there are winners and losers and we are well positioned to win with the winners.
Currently, Android and IOs are the dominant ecosystems. Within Android, Samsung has pulled ahead of the path with a very strong offering across the board in low, mid and high end offerings. As we look to the future, there appears to be a third ecosystem that has a chance to succeed. It is the Windows platform with Nokia being in a strong position to succeed. We are well positioned in mic, speakers and receivers in all ecosystems to take advantage of this growth in 2013.
So let’s talk a little bit more about the dynamics of our products in the marketplace. First, let’s discuss microphones or voice input devices. As we have been predicting many new applications have emerged to use our microphone technology, noise reduction and (inaudible) leading to clear voice calls; noise cancellation make it easier to hear the speaker. Wide band stereo recording, I could go on an on. The key thing is all these applications require more microphones. In the nearly 2 billion unit handset market, we are seeing an increase in mics per phone from 1.17 to 1.43 in 2013. This trend is particularly acute in the smartphone market with some new phones using three microphones. We expect this trend of increasing microphones to continue beyond 2013.
Now let me spend a little time on the MEMS microphone market. There are a number of research firms in the market being paid to try to make assessments of the exciting and growing category. As the leader, we're uniquely positioned to comment on their findings. In 2012, we estimate our share of microphones is only a few points down from the mid-80s and this was expected as customers bring second sources on.
Now I will comment on the competition. There are many markets and customers that are buying MEMS microphones and they will all like a second source to know. In the majority of our applications, there is a second source, but we are yet to see one competitor emerge as the primary second source across all customers or applications. We see one competitor and one account and another at the next. We even see different competitors within the same account. Bottomline is Knowles continues to set the standard with new products. We have the broadest portfolio product and we are the only MEMS mic producer with the scale necessary in the high volume, high performance markets. The future continues to be extremely bright.
Now on the speakers and receivers; consumers are looking for louder and wider bandwidth speakers. At the same time, the OEMs in the market are increasingly trying to improve their speed in the market. In order to achieve these goals our customers are looking to provide integrated designs with plastics, connectors and speaker technology integrated in. All these integration and higher performance requirement is driving average selling prices higher in each successive generation of product; we expect that to continue in 2013.
I think this chart that we have here below is a great summary of the dynamics in the handset space for both mics and speakers. What is notable that if you look at previous presentations I have done the new future has changed, again and to more acoustic content through more mics at higher ASPs of speakers and receivers and you know Knowles is positioned well to take advantage of this growth.
Now you have heard from me but what is more important is to hear what a potential customer say about the importance of audio. Let’s go to the video.
Great story about why our customers want premium audio. We have spent a significant amount of time reviewing the smartphone market and rightly saw the size and the growth prospects make it very important, but there are some secondary markets that we still target, specifically the notebook and tablet market is of significant interest. Knowles position in the laptop tablet market had been and continues to be strong and we expect growth in 2013. We also believe there is upside opportunity for us in this market.
First, in the notebook tablet market, we have yet to see the impact of multiple mics with new audio input applications as we have seen in the handset market. Second, Sound Solutions has been focused entirely on the handset market, but we believe their technology has significant benefits to offer in this market, although at ancillary market clearly this is a great opportunity for us.
As time has gone on, we are increasingly thinking about our new product plans in terms of evolutionary products, of products that are basic offshoots of existing products. These products are and continue to be driving short-term growth and an incremental improvement over existing products.
Our revolutionary products are products that have a significant amount of new technology and have game changing effects on our market. First let's take a look at some of the new microphone products which will drive our growth in 2013.
2012 was a great year for new products with our silicon microphone but 2013 will be an even better year with 25 new models having the potential to drive a very significant portion of our sales.
All the products are a combination of new MEMS, new ASIC and or new packaging technologies. These products improve features such as signal noise, reliability, robustness, bandwidth, power usage, etcetera providing a combination of productivity improvements and benefits which goes directly to the end consumer.
A great example is our new ultra high signal and noise ratio mic. All in the size is very close to being the smallest microphone we've ever built. This mic has a new ASIC, a new MEMS and a new package and will provide the benefit such as increased performance in recording applications, a great story of continued success.
In the speaker and receiver product category, we are preparing for a strong year in new products sales as the fruits of our investment over the last 18 months start to take hold. Six new product platforms will be introduced including our silicon membrane technology which provides for a significantly louder speaker in the same form factor as traditional membrane technology.
There's also been a focus on reducing the length, width and height of our speakers and receivers while maintaining the performance for the next generation of Smartphones. This allows our customers to do things such as make the screen size larger without compromising expectations of the consumer for premium audio.
The majority of these products are either in production today or will be shortly and will have a significant impact in 2013. Overall, next year we expect a number of high profile Smartphone introductions and with a tremendous investment we have made in new microphones, speaker and receiver products, we are confident in our position on these new platforms. 2013 will be a great year.
One of the products that we are particularly excited about is our ability to build a speaker box with integrated space enhancement technology known as N'Bass. This technology was highlighted at Dover Technology Day earlier this year and is a constant step forward in performance by providing deeper, richer sound in portable electronics.
To-date we have tried this technology in a number of mobile applications but now we have our sight set on our first high volume design wins in 2013. This is also the important step forward for us as our system solution approach begins to gel. We now possess all the individual components necessary in order to deliver turnkey acoustic solutions to our customers. We have microphones, speaker and receiver technology. We have a strong capability in area of mechanical integration.
We have invested heavily in integrated circuit technology through our two design centers as well as our partners. Additionally, we are already garnering revenue from our speaker boxes and have designed, assembled and built up facility for delivering microphone and flex circuits.
The individual pieces are all there. The last set is to create a separate design manufacturing and supply chain for managing these complex products and we now expect to start seeing revenue in late 2013 from our system solution group.
We are only the supplier possessing all these technologies and capabilities and it provides a unique opportunity to add more value to our customers. The systems approach is also driving another fundamental change to how we view ourselves.
In the past, DCT was the portfolio of companies effort individually managed from an operational standpoint. We believe in focused R&D, advanced manufacturing, sales and marketing are all critical in order to understand our market and to be as close to our customer design process as possible.
But we have to use our operational scale across as many of the products as possible. Our first step in creating an integrated platform was to create one manufacturing team across all Asia.
The first goal is to leverage shared service organizations to make them more efficient. Good examples are having one common ERP system, having the ability to develop talent across all Asian locations as opposed to site-by-site and integration of our supply chain to purchase best cost countries or even become vertically integrated in areas such as stampings or plastics. It's all about leveraging scale.
The second is to make sure that we're using all our manufacturing technologies in the most efficient way possible to improve speed of time to market and standardize product activity improvement process across our companies.
We believe this is the first step to becoming an integrated company but there are many more opportunities which we will be exploring in the future.
Just to expand on the theme from the last slide. The market dynamics are changing and we are in a great position to take advantage with not only the broadest portfolio of products but also the broadest portfolio of manufacturing technologies from very high volume solutions all the way to high mix with high labor content product.
Today in Asia, we have four factories in China, three in Malaysia and now we will have a new location in the Philippine, each location has their own unique capabilities and strength and each individual company in the DCT Group benefits from having such a large infrastructure and technology capability.
Now, I would like to provide an update to you on Sound Solutions. Although, the bottom line results in 2012 were below my expectations, many of the building blocks of our future success were set. So I thought the best way to update you is to let you know what our customers are saying about Sound Solutions.
I have talked directly to a number of our largest customers and first off from a technology and automation capability, they believe we are the leader. Due to low investments in the pre-Dover ownership, our customers viewed it as a necessity to increase our investment in new products. This will continue tin 2013.
This has allowed our relationships with our customers to strengthen and expanded the amount of time we are spending with them on new designs. The bottom line is the strategic rationale for this acquisition and how it has changed our customers’ views of us was clearly correct.
Our large customers view as a strategic acoustic partner for the future. But we are not where we want to be yet. Let me cover some of the things we have done and intend to do and lay the groundwork for our expectations are today and in the future.
First and foremost, operational improvements specifically in Asia, Sound Solutions had only one manufacturing location in Asia, with this limited presence and difficulty recruiting and keeping talents and limited reach in terms of supply chain. Today, Sound Solutions Beijing is fully integrated into the North Asian operations with one common management team.
As an example, the person now runs the facility is the former general manager of our (inaudible) operations in China. We have installed Oracle, we have standardized approach to launch of new products and standardized new approach to productivity improvement, we have a laser focus on sequential improvement.
Second, as discussed above, we have changed a number of key people in the senior management team of Sound Solutions through a combination of internal people as well as bring on a number of new individuals. Chief among them is the new President of Sound Solutions who has been on board since August and he is already having a significant impact.
Third is customer diversification, we need to win with the winners but also need to be equally balanced across the major OEMs at today’s winners may not necessarily be the winners tomorrow.
We have made progress in 2012, but the new product portfolios that we will be introducing, we will make this change more pronounced in 2013 and that relates to the last point which I've already spent a fair amount of time on. New products are critical to sound solutions in 2013. In the short term, it’s about execution with new customers and improving the financial result. 2013 is a year when the entire team will be demonstrating sequential improvement based on these new product sales.
We have a three year goal of getting to the upper teens margins and these plans are within reach and it is on our shoulders to execute as the end market demand for Sound Solutions types are strong.
In summary, the end consumer markets in which we compete in are growing robustly. Additionally the acoustic performance, content and supporting content continued to increase in order to improve the consumer’s audio experience. We are well positioned to take advantage of these macro trends in 2013, with a slew of new microphone speaker and receiver products. Lastly although there have been challenges Sound Solutions is of strategic importance to our acoustic businesses, and on the right path.
Now let's talk about the plastic growth for DCT. First on markets, in the consumer space although a significant portion of our business comes from smartphone, we are in a number of other consumer products such as feature phones, laptops and headsets. Overall a very robust market. We expect our silicon microphone business to continue to take share from the traditional ECM technologies, while our speaker and receiver business will do the same to new products and new customers.
Medtech markets continue to be a positive story based on ageing western populations and growth of the middle class in emerging markets. Aerospace and defense is mixed with commercial plane build continuing to rise, partially offset by the uncertainty of defense budget. Lastly our telecomm infrastructure markets continue to be challenged as telecomm service providers scrutinize their capital spending.
Now let's take a first look at 2013. We expect strong smartphone growth to propel us again in 2013, and this will only add to the scale we had driving additional productivity gains. In Medtech we expect continued steady growth with new products and mix driving productivity gains. For aerospace and defense, we see strong sales in commercial aerospace driving margin expansion, partially offset by potentially challenging defense spending.
In our other smaller markets we will continue our efforts to right size our infrastructure which will allow us to expand margin in spite of market headwinds. In summary, our brands and products are well positioned in markets that are expanding rapidly, and this will drive significant revenue growth going forward. We have made significant investments in new products, investments in productivity gains and global expansion that will drive revenue gains and margin expansion.
Lastly this segment has commonality both operationally and technologically, and we will see this as a source of additional growth and margin expansion going forward, a truly exciting opportunity for all of us. And with that I would like to introduce Brad Cerepak.
Thanks Jeff. Today we're focused on growth for 2013, rightfully so in these tougher economic markets. We believe we have built a balanced and executable plan for 2013 based on a modest macro environment and strong positions in our five growth spaces. We're enthusiastic about our businesses and our growth prospects in to 2013.
Today, I will provide an update on 2012 EPS. This update does not reflect any changes to the underlying operational performance of our businesses, as the quarter is coming in essentially as plan. By then we will provide our traditional financial framework for 2013, which includes revenue growth rates, margin expectations and other financial metrics. I will also break down our revenue growth by segment.
Inclusive of our recently announced initiatives including share repurchases, acquisitions and divestitures I will provide specific EPS guidance for 2013. This is new for this year. We will then look at our three-year outlook and wrap up with some thoughts on capital allocation. On our third quarter conference call, we provided full-year 2012 EPS guidance of $4.55 to $4.65. Since that time, we've announced three significant actions. The acquisition of Anthony, our plan to sell our electronic equipment businesses, and lastly, our 1 billion share repurchase.
All these actions have an impact on 2012 and will carry us into 2013. Let’s go over the adjustments. First, the upfront acquisition and one-time costs associated Anthony will impact 2012 by $0.02. Next, as we presented in a revised data we released last Thursday, the earnings associated with our electronic, assembly and test businesses drops down to discontinued operations. The full year impact is $0.18.
Lastly, the impact of incremental share repurchases will add $0.01 to 2012 EPS. We have already been active in the market in buying back shares and plan to purchase approximately 200 million to 250 million of the 1 billion share buyback in Q4. This buyback in Q4 would be more powerful in 2013, as it enters into our weighted average shares outstanding. As a result of these actions, our revised 2012 EPS is now $4.36 to $4.46.
Now let me provide a framework for 2013. We expect revenue will be up 7% to 9%, organic growth will be in the range of 3% to 5%, acquisitions already completed in 2012 will add about 4%. The acquisition growth includes Anthony, Maag Pump and the PCS acquisition in energy. We really like these acquisitions because combined they are expected to grow in mid to high single digits in 2013.
From a margin perspective, we expect our productivity initiatives to be a positive contributor and pricing to remain stable. Margins will also continue to expand on volume and improve performance. These gains will be partially offset by increased compensation and slightly higher pension expense. Altogether, we estimate segment margins will improve 30 to 70 basis points.
Our anticipated growth coupled with margin expansion should grow earnings nicely next year. In fact we would expect to convert the volume in the mid 20% range. Interest expense will be slightly up next year, primarily driven by the incremental debt connected with the Anthony acquisition which was initially funded with commercial paper. Our plan is to term out [DCP] in early 2013. And corporate expense will be higher due to the previously mentioned pension expense.
CapEx will be roughly 3% of revenue as we continue to make investments for growth and productivity. Finally, we expect the full year normalized tax rate to be fairly consistent with our 2012 rates.
Now let's take a look at revenue by segment. We expect communication technologies growth to remain strong driven by several new anticipated product releases in the handset market. Organic growth should be in the range of 9% to 11%, as the men’s market remains robust and we see sequential quarterly improvements at Sound Solutions. Together, we expect our acoustics businesses should show around 20% growth 2013.
Now in the Energy segment, we expect the production in downstream markets to perform well next year and to drive organic growth. Carryover acquisition growth will add 2% for full year growth of 5% to 7%.
At Engineered Systems, we expect organic growth of 2% to 4% as our refrigeration equipment and fluid businesses continue to focus on product innovation and customer service. Acquisitions will add 8% for our full year growth of 10% to 12%.
For printing and identification, we expect growth of 2% to 4% driven by further gains in our new products and geographic expansion initiatives. In total, we see 2013 organic revenue growth of 3% to 5% and acquisition growth of 4% for full year revenue growth of 7% to 9%.
And as a reminder, this is before closing on any potential acquisitions already in the pipeline. It is possible a couple of small add-on deals could be completed before the end of 2012.
Now let's go over 2013 guidance, using our adjusted 2012 as a base, acquisition accretion at $0.11 to $0.14. This range includes roughly $0.10 to $0.12 of operational results of Anthony and the rest coming from acquisitions completed earlier in 2012.
We expect earnings to benefit from continued strong conversion on revenue growth to deliver $0.40 to $0.52. Our share repurchase activity in the fourth quarter and into 2013 should add $0.25 to $0.30. This estimate is based on a repurchase plan that is slightly first half weighted. In total, we expect 70% to 80% of the program to be completed by the end of 2013.
Finally, corporate and interest expense will be about $0.07 higher next year. The primary drivers are higher pension expense included in the corporate number and interest expense associated with acquisition of funding. Overall, we expect 2013 EPS to be in the range of $5.05 to $5.35, up 18% at the midpoint.
Okay, now looking at our three-year outlook. Organic revenue growth should be 4% to 6% on an annualized basis. This outlook anticipates improving markets beyond 2013 and will be complemented by acquisition growth.
For instance, Anthony will add one point to this three-year outlook for a total of 5% to 7%. We expect to see segment margin improve over the period, margin should increase on average about 50 basis points annually over the period as we continue to benefit from productivity initiatives and improved business mix.
We also expect our sustainable tax rate and CapEx spending to be fairly consistent over the period. And as we said last year, we remain committed to our long standing financial policy.
We believe our strong balance sheet, investment grade rating is important. Further, our emphasis on cash flow allows us to fund many initiatives internally and allows us to return significant cash to our shareholders in the form of increasing dividend and incremental share repurchases. We remain committed to actions that maximize shareholders’ value.
Now, I want to go back for a moment to the subject of margin expansion. As this slide show, 2012 margin was impacted by performance challenges at Sound Solutions and $14 million of net restructuring charges.
Including these costs, we will end the year at about 17.2% margins, a slight increase over last year. When we look forward to 2015, we see a path to 19%. As always, volume and productivity will continue to drive our performance.
Equally important to us is cash flow. We remain committed to the goal of generating free cash flow of 10% a year or better. Continuous Lean projects, our strong focus on working capital management and our expanding margins are all key drivers of our free cash flow generation. These actions should allow us to exceed $1 billion in free cash flow annually by 2015.
Finally, with respect to capital allocation, the chart at the top illustrates that we've historically enjoyed strong cash generation. For 2013 to 2015, we estimate we will generate roughly $3 billion in free cash flow.
Our priorities remain unchanged. We will fund those internal projects which strengthen our businesses. As you frequently heard today, projects like international growth, shared manufacturing, capacity expansion and product innovation will be our top priorities.
Secondly, we will continue to grow the dividend annually. Further, acquisitions are important for our long-term growth. We continue to see ample opportunities deploy cash to our growth spaces.
And lastly, we will execute on our 1 billion share repurchase program and beyond the completion of that program, we would expect to buyback shares slightly above dilution.
As we think about the $3 billion of free cash flow generation over the next three years, after our dividends and after the share buyback, we expect to be able to deploy roughly $2 billion over the next three years towards acquisitions and other value creating actions.
In conclusion, I am excited about the positioning of Dover as we close 2012. We have strong businesses and a great balance sheet.
Now I would like to turn it back over to Bob for some final thoughts.
Okay, thanks Brad. I just got a few comments to share and then we are going to go to Q&A. So in front of you on the screen it’s in your book as well, some key takeaways from the segment presentation today.
I am not going to read these, I read them to you earlier in my opening comments, I hope you can do and check the box and say yes I picked this up during the segment presentations. What I do want to share with you is perhaps three or four; I will call it Dover takeaways, things in want you to recognize that we are very focused on for the next year, for the next three years. And I know that you have heard these comments during the segment presentations today.
Continuing global expansion, this is very key to our growth initiatives, to our building value for the shareholders and to us strengthening our company. Continuing initiatives around operational excellence, you have heard it in all four work segments today.
Its real, it’s in every single business, it is very important for our margin expansion, its very important for us to fund some of the internal R&D and innovation projects. The third one is the takeoff of that comment.
We continue to increase our efforts in R&D and innovation for the customer, and you have heard this in every single segment presentation today. All of this together along with the changes that we have made, the changes will continue to make to strengthen our portfolio, to strengthen our business, gives us a firm belief that the actions we are taking and the decisions we are making, go a long way to strengthen a company of Dover.
Okay, Paul with that, we will take one question.
If you could just wait to allow, you get the mic before you ask the question that will be helpful. Let's go with Shannon first.
Shannon O'Callaghan - Nomura Securities
Yeah, maybe you just put more color on the favorite topic, your Sound Solutions is to may be ’12, and in ’13 update and so where the yields of (inaudible) and how much swing there and you baked into next year?
What's your second part, how much is swing on you?
Shannon O'Callaghan - Nomura Securities
Sound Solutions and yield --- compared to ’13?
Okay, well, I'm going to call on Jeff to perhaps add some detail to this but our activity and our actions and the benefit we are seeing in the fourth quarter are as expected as we came into the quarter.
We are seeing our sequential improvement in the business results. We continue to see improvements in yields. I know on all of the designs that we were placed or won earlier in the year where the customer has launched their product in the third quarter we are shipping on all of those designs and I think Jeff a little bit of noise around every product but without any major change or actually shipping not only our plan Shannon and three or four of the products we are shipping as much as we can produce.
The yields have improved. If you look forward into 2013 what was the number here, we are looking at about 20% growth, guys now the (inaudible) right; we are looking at about 20% growth in our acoustics business next year. It’s pretty evenly split between those and Sound Solutions and we do expect sequential improvement quarter-to-quarter in 2013 from Sound Solutions.
Shannon O'Callaghan - Nomura Securities
And so our yield for speakers and receivers took to breakeven yet or I know…
We get to build through every individual product but the bulk of the market, yes.
Shannon O'Callaghan - Nomura Securities
Okay, maybe just question on product ID too, I mean you talked about this two-year kind of transition along with the investment changes I mean now we are exiting second half of last year about 15% margins there. Is that done, are we funding the business?
We are exiting which year? You said 2012?
Shannon O'Callaghan - Nomura Securities
Second half of the year?
’12, I will tell you that at Markem-Imaje, the margins are better than 15% as we exit 2012. The segment margins are close to what you are commenting on, but the margins that Markem-Imaje I would say are very, very close to being what they had been and what we've enjoyed historically.
Shannon O'Callaghan - Nomura Securities
And to get in there you have to do some restructuring on that permit that were all there in the first half. Are we done with that, is the condition over.
There probably won't be any restructuring in 2013 that would be of the size that we would even bother to report on. But I'm not going to say that there won't continue to be a little bit.
Shannon O'Callaghan - Nomura Securities
Bob if I look and compare your three year look forward a year ago versus today, I realize the macro is not good for ’12 and ’13, but ’14 if you sort of line this up you kind of had a midpoint of organic growth of 5% today and you had it at 8%. I guess I am wondering so let's get beyond (inaudible) economy in ’13 what's accounting for the discrepancy in ’14, like why were you more (inaudible).
You have both charts in front of you, so are you going to catch me with my answer. I actually think the biggest difference between the three year outlook we provided a year ago and today's three year outlook is we are probably taking the energy outlook down a couple of points. Is that true that Bill? Okay. Within Engineered Systems I don't think there's much difference in our outlook today versus a year ago. I don't think there's much difference in DCT. At DPI it’s a little bit different because we've got a slightly different structure now with the divestitures but a year ago I'm not sure that the outlook…
Shannon O'Callaghan - Nomura Securities
(Inaudible) assembly would you bake that into the numbers a year ago, in’14 I mean.
Now we are going to start talking about this (inaudible), that I can tell you John that when we did the outlook at year end of ‘11 and we've looked at ‘12, ‘13 and ‘14, we were assuming that it was going to be a market recovery for the electronic assembly and test businesses. We've come to the conclusion over the past three or four months that we sure aren’t going to see that in 2013 and that’s probably one of the contributing reasons for the announcements of the divestitures.
Shannon O'Callaghan - Nomura Securities
So within Comtech, as smartphones have penetrated in North America substantially, you are obviously in a sweet spot, right, with respect to (inaudible)
Not just North America.
Shannon O'Callaghan - Nomura Securities
Right, but I guess my question is the markets in these tax basis look straight far forward. Look at Apple, whatever. At what point do you have to begin to worry about increasing commoditization or competition or whatever. I realize the business is fantastic. Is it a two-year outlook, five-year outlook, what's your (inaudible)?
We don’t see the threat of commoditization on these products in the next two to three years. Five year outlook in the tax base is almost infinity. But not to be smart with the response, but that’s pretty long term.
If I can just add to that, I mean what we continue to see from our customers, which are people in this room, they want better speakers, they want better receivers, they want better audio and our OEMs are willing to pay for and that’s not a trend that is slowing down. We look forward next year and the year after we're starting to look at some. It's all going to be first of all more components and higher performance in terms of audio to only improve that performance.
And we believe that we're at the forefront. We're going to be the leader on offering the integrated audio solutions.
Shannon O'Callaghan - Nomura Securities
Thanks, Bob, and you introduced yourself by talking about the quarter. I was just wondering can you may be go back to the quarter, it seems like things are going okay.
Shannon O'Callaghan - Nomura Securities
Fourth quarter, yeah $0.10 range and any thoughts on [tightening] of that range to the midpoint or high point.
Yeah we had some thoughts and (inaudible). Next question.
Shannon O'Callaghan - Nomura Securities
So interesting color on the mic and handset trajectory. What about revenue per chip, so what is happening to revenues per handset so the volumes are going up (inaudible).
Okay, well Jeff showed a slide in his presentation that showed past, today and future based upon the type of phone. I call it an entry level phone, a feature and a smart phone. And if you flip back to his deck, you will see the acoustic revenue that we will get today on a smartphone and what we think that acoustic revenue will be a year or two from now also in a smartphone and help me with the numbers.
I think if we look out into the future on the smartphone, you are looking at acoustic revenue per phone of $4 to $8, and I know that seems almost as wide as our $0.10 spread Nigel, but the variability in some of these designs between the different OEMs is rather significant.
Jeff mentioned earlier that several smartphones out in the market this year that are using three microphones per phone. There are we know that there are a couple of OEMs who are looking at a smart phone design that incorporates four microphones. Now that’s not to say that that would be introduced in 2013, but we know that they are looking at.
Just one last comment, you asked the question about specifically about your preferred ASPs. What's driving our ASPs is more about mic then it is about communization, and there is a misnorm out there that we are seeing large price decreases. We introduced new products. And the new products are coming and actually higher ASPs in the previous, but its about mix because some of our customers want lower performance solutions for lower end of the market and some want higher performance and that drives a lot more of our ASP, but we are able to design products that fit those markets spaces, whether premium mid or large?
Yeah, I think it’s fair to say that in 2011 and 2012 we have never seen the spread on an ASP range that had in the past like we have seen this year and its not because the prices on the low end are dropping, it’s because the newer products on the comp end and the better performing audio products are being sold at such a higher price.
Average ASP. Well, that's a double. ASP for mics in 2012 last year was relatively flat.
Shannon O'Callaghan - Nomura Securities
And 2012 a very low-single digit decline in ASPs that's not commoditization.
Shannon O'Callaghan - Nomura Securities
Just a clarification please from Brad Cerepak, you are talking about incremental revenues and you use to turn the (inaudible)
Which [characteristics] are we talking about?
Shannon O'Callaghan - Nomura Securities
Shannon O'Callaghan - Nomura Securities
You said incremental conversion in the mid-20s, did that mean incremental margin?
Are you asking about financial question?
Shannon O'Callaghan - Nomura Securities
No, I said its for Brad.
Shannon O'Callaghan - Nomura Securities
Did you mean insight that your incremental margins were in the mid 20s?
Our conversions on the incremental revenue will convert in the mid 20s.
Shannon O'Callaghan - Nomura Securities
Why would it be so low? What am I missing?
Well you know the way we like to think about it and the way we've articulated in the past, we would expect to convert at around 80% to 85% of our gross margin. Now it depends on mix, it depends on where the revenue is coming from. It could be better, but historically we would say we are right in that range.
Shannon O'Callaghan - Nomura Securities
Alright and next for Tom if I may, when you talk about having your revenue trajectory up 10% to 12%, do you have confidence that you will be able to deliver at that rate of demand.
Yes, we do, we have plans in place and our facilities are able to manage that. So we are comfortable with that.
Shannon O'Callaghan - Nomura Securities
Let me slightly rephrase it why are you comfortable that you can deliver at that rate.
Okay, let's start first by responding to the two parts of the revenue forecast of ‘10 to ‘12. Your organic is 2 to 4 and the acquisitions are 8. So the acquisitions pull along 8% of that 10 to 12. So we are looking at uplifting our existing facilities of 2% to 4%.
Shannon O'Callaghan - Nomura Securities
Thank you for walking into my trap.
Thank you, I have a clarification on the accretion guidance for Anthony, the $0.10 to $0.12 had a parenthesis interest what was (inaudible). Paul you need a mic.
Unidentified Company Speaker
The interest associated with Anthony in the corporate interest line is embedded in that $0.07.
So that's not a full embedded accretion.
Unidentified Company Speaker
And then on Anthony the business mix includes about 10% of Hill Phoenix revenues as well as revenues coming from your competition. You expect much in the way of churn there or you just take command of that close to case business.
So let me start my answer by giving you a couple of data points on Anthony. If you look at Anthony, North America versus rest of the world, about 80% to 85% of their revenue was in North America. The rest of it you will find a little bit in Brazil, some in Europe and some in China. Of the 85% that's, okay that's a geographic split, the other split is about 70% of their business is doors, and 30% of it is services.
Before you asked a question what services we would label re-skinning as services; of that 70% that’s doors, so that’s roughly, let me do some easy math, that’s roughly 200 million. Of that door business that’s 200 million, 30 million of that is a supply to Hill Phoenix, about another 30 is a supply to the other OEMs that’s Hill Phoenix competitors.
We did not approach them in our due diligence until HSR was approved. But between HSR and closing we did talk to all of the competitors, they are very interested and they are continuing to supply relationship with Anthony, and I don’t know if we have got anything to report but I do know that we are negotiating and trying to agree at their request on a long-term supply agreement. They want to stay with them. Did that answer your question?
Yeah, it did and just a quick question for John on printing and identification 59% is after market, but you suggested you are not capturing all of the consumables. What piece do you think it’s going to third party?
That number geography and by a product line in places like Asia there is opportunities to grow by another 20% in that area, the emerging or the developed markets it’s actually lower than that.
The French term is (inaudible) so I think historically [Mark Lamont] has the lead and again as John says it will vary from country to country or region to region but about 20% of our consumable sales we believe do get supplied by third parties.
Any other questions? One hand there Nathan?
Nathan Jones - Stifel Nicolaus Weisel
On productivity improvements in 2012, we got $100 million from the plus three and didn’t get a number of adjusted business; that’s going to be more than operating income increases this year. Can you talk about where the pricing headwinds were and in what part of the business and what your expectations are for 2013?
You are asking me why all of the productivity doesn’t went to earnings?
Nathan Jones - Stifel Nicolaus Weisel
Well I assume that pricing was the headwind to offset that partially?
No I am not sure that’s our outlook for ’13; I would say that the price cost relationship would be rather neutral for 2013. The guys as they presented, there were segment presentations. Tom talked about his $50 million of productivity savings and I think Bill had a number of $25 million or $30 million that’s the growth savings; some of them gets reinvested in the business; we are significantly trying to push companies that increase our R&D spending and our business development spending some of which some of the productivity savings do get redeployed inside the business to pay for some of those.
Unidentified Company Representative
And I would just add to that. I think Bob you did, (inaudible). Gross productivity is before labor inflation. In other way, another offset to that number.
Nathan Jones - Stifel Nicolaus Weisel
So, would you say, you were positive neutral or negative on price cost in 2012?
Nathan Jones - Stifel Nicolaus Weisel
In ‘12, my response would be slightly positive, but it's very minor.
Nathan Jones - Stifel Nicolaus Weisel
Yeah, just a clarification on Sound Solutions. It sounded like a lot of the performance improvement you are counting on is predicated on winning new business, some market share gains and on that, can you give us a sense for the timing. Is there going to be, you know, your typical like technology, seasonality, where you see it in the second half of the year or are we going to get some affirmation of that in the near-term and also could you characterize to the extent you can?
Okay, so the one new OEM product launch that comes to mind that will flow into the first quarter and in to second quarter is may be 10 launch. I am not sure that there are significant other new OEM product launches scheduled for the first half of the year. Is that true, Jeff?
That would be true.
Okay, so the sequential improvements, the sequential improvements we're expecting in the first quarter over the fourth and then continuing into balance of the first half is also the existing design wins and in increasing our share participation and some of those current programs.
Just for a moment to comment there is seasonality in the business as you acknowledge.
Yes, second quarter plus you have Chinese New Year first quarter, there is some seasonality in this business but I would say it's we're inside the window of understanding these design wins for the back half of the year and we're actively engaged. So we feel very comfortable with where we are on the design cycle with these customers both on mics, speakers and receivers.
Nathan Jones - Stifel Nicolaus Weisel
And just switching gears a little bit on Energy, it's been a bit of your growth over the last several years. Is it kind of correct to think of that as the margins kind of flattening out there? They are very high levels and you know, it sounded like (inaudible) incremental kind of cost savings into investment for growth and then second part of that is a lot of the growth is international. I think you called out 20% growth in international markets. I think that would put to maybe 3% or 4% growth for the whole segment. So it seems like there might be a little bit of conservatism baked into Energy top line as well for…
Okay, so let me correct something. You picked up in the presentation. I think the number that Bill was throwing out on 20% international growth, it wasn’t for the segment, it was for production. It wasn’t for the entire segment. Is that true, Bill?
Yeah, that’s right, Bob.
Now, with Bill in the room, I am going to have to answer. I expect him to continue to work to improve margins. As Bill leaves the room, I am going to tell you that’s actually not what we're trying to do. We've got this business as performing across the board as such, a superb level that we're trying to grow the business, especially production and downstream. Some of this expansion is going to take place here in North America but the bulk of what it what we're trying to do outside of North America, in the Middle East, in Asia Pacific and South America.
Some of the new, I would call it, product adjacencies that the businesses are working on organically. We're giving them the nod to maybe take a slight, very, very slight step back on margins for a year or two, to start a growth initiative and a new market adjacency. So my summary response would be, don’t’ expect margins in the energy segment to continue to expand. That’s not what we are trying to do with energy over the next couple of years.
Maybe a market question on Anthony first. Can you talk about in the close the case opportunity, may be how much of the market is open cases and then also how much of Anthony is [C] stores today.
So I gave you a number earlier. If you look at Anthony’s revenue about 70% of it is doors, that’s roughly 200 million and about 30 of that is to Hill Phoenix, about 30 of that is to Hill Phoenix competitors and help me here Tom. I am going to say, it’s about $25 million goes into the [C] store mark channel.
It’s actually larger than that Bob, its going to be closer to 40.
So then, one on Comtech, you mentioned the share declining slightly below the 80% and some of that…?
No, I think we said a few points below the mid 80s is gone up.
Okay, thanks for clarification there.
My interpretation of that is that we are still above 80.
Okay, but partially due to customers diversifying their suppliers, where do you see the customer base in that diversification process, are they done with that, and execution in this year has any impact on the number?
My first comment will be, we had no executions issues at Knowles this year. Jeff, you want to respond on a couple of customers?
No, that's okay. We had no execution issues, we expect a couple of customers and a couple of applications where we expect to see slight declines in share again next year, and that's what we are expecting. But the volume is going up dramatically again next year, as the (inaudible) is rising dramatically.
All customers are not the same with respect to diversity of supply, okay. No more questions, I want to thank you all for coming. Thanks for spending four hours of your time this afternoon with us. We enjoyed it very much and we look forward to see you throughout the year. Have a great Christmas, thank you.
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