Dover Corporation (DOV) Earnings Call Transcript & Summary

Great. Well, I think we're ready to begin. Thank you, everyone, for joining us for the Barclays 38th Industrial Select Conference. Obviously, we have to do this virtually rather being in Miami, but maybe next year we can return to that location. It's my pleasure to kick this event off with Dover Corporation. We have with us this morning, Rich Tobin, President and CEO; and also Brad Cerepak, CFO. Please e-mail me any questions that you have, and I'll try to get around to them. This will be about a 30-minute-or-so Q&A session. And also for anyone who is logged on, please see the survey questions on the side of the screen. And if you get a minute, please try to answer a handful of those if you have time. So with that, I'll start off the Q&A.

Maybe, Rich, give us some sense of how bookings, near term, have performed, if you've seen that strength from the fourth quarter persist into this year. And also, I suppose, yes, there's a lot of questions we get from investors around inventory levels is big restocking needed at the customer or distributor level. Any perspectives on that?

Sure. Julian. Look, bookings closed quite well for us at the end of the Q4, and that trend has continued on to January. So bookings are up year-over-year across all segments with some variety of differences between the two, which I'm sure we'll get to in the Q&A. What's driving that? Look, I think that the economies in the world are beginning to turn around to a certain extent. This issue about restocking and maybe let me clarify some of the comments that I made at the end of Q4 about input costs and logistics, which some construed as being negative. I think it's just a reality of the fact. And we -- and that was not a comment that was post, us developing our guidance. And then we can see raw materials costs moving up and logistics costs moving up throughout the fourth quarter. So we've accommodated that in our -- into our projections for the full year. But rather than restocking, I would argue that there's a little bit of get in the front of the line because of two real issues as that producers are going to try to pay -- the raw material prices are going up because most of those are contractual. So they'll come in sequentially based on our buy forwards, if they're metals based. So we will be raising prices, and we begin to sit in the marketplace, sort of that we will. So there's an element of like get in front of the line in terms of before those pricing takes effect. It's not a bad trade for us to a certain extent because the larger our backlogs are, the more efficient that we can run our operations. So to the extent that we can kind of balance that as we go through the first quarter, that's fine. So I don't think there's this issue of the channel going to restock in Q1, and then it's going to slow down. I think that, if anything, the bookings are a reflection of everybody sees what's going on in terms of raw materials and everybody feels what's going on in terms of logistics constraints. So it's relatively a healthy dynamic. It's just up to us now to execute and see what kind of pricing that we can extract to offset a portion of those headwinds.

Thank you. And when you look at that pricing environment, are you seeing most of your competitor companies across Dover's disparate businesses all start to push those prices up? Or you think you'll need a mix of productivity savings plus higher prices to offset cost inflation?

Yes. I mean our assumption always is that productivity offsets inflationary input in a general year. In this particular year, I think that what we're seeing in terms of commodity prices and logistics costs, I think it would be difficult. I think it's doable, but difficult to offset all of that headwind with productivity. So there needs to be an element of price. Now having said that, a lot of the businesses that we run because we buy cast iron and sheet metal and everything else, the customer base may not like it, but they are used to pricing moving with commodity prices to a certain extent. They'll give you absolutely no credit for labor inflation. But when it comes to commodity, I think that is known within the industry or portions in the industry which we operate in. We've begun, in certain cases. I don't want to name names of -- from a competitor point of view, but we have begun raising prices in certain places. We're doing it in refrigeration, for example, just because of the size of the backlog that we have and because it's preponderance of purchased inputs. And so far, it looks like the competitors are following it. But I mean, let's see how that develops over the balance of the year.

Thank you. And on that bookings performance in the first quarter or in January, any segments that you would call out where you're seeing that particular sharpness of recovery take place, which businesses or pieces of the segments are leading or lagging those bookings?

Look, Refrigeration & Food Equipment is a trend that has continued through the fourth quarter and last year. So I think we kind of expected that. I think that we are, I guess, pleased with what's happening in Fueling Solutions and Pumps & Process Solutions. I think the bookings are running a little bit ahead of what we would have expected. I think on the Pumps & Process Solutions, it's driven by biopharma, which has continued to book extremely well. On the industrial pump business and Fueling Solutions, I think that is back to this issue about raw materials are moving up and logistics go up, logistics are getting tight. So there's an element there of "If I need the product in April, I better get my order in now."

Thank you. And when you look at the broad environment, lastly on demand, do you see this as one where it's the beginning perhaps of a very sustained, prolonged period of high industrial growth or it's more of a catch-up following a shock and then we sort of level out again at the growth rates pre-COVID?

Look, I mean, it's hard to say. I -- Look, there is a general recovery. From a Dover point of view, we only shrank 6% last year. So it's not as if we went down 20%, and then there's a big snapback. So I think that way, but what we have is high single digits guidance, which is better than kind of the on-the-run average when we can get back to revenue for Dover to a certain extent. So I think there's a little bit of everything going on. I think that we have portions of our portfolio that is still struggling because capital equipment is still relatively slow. Textile business as well. Food equipment continues to be slow, and they were betting on recovery, but those are more levered in the second half. But overall, I think that you know that we are -- we've got a seasonality where the first quarter and the fourth quarter are the weakest quarters for us that we make our hay in terms of revenue, at least in Q2 and Q3 to the extent that our backlog in Q1 looks like it is, that makes us feel pretty good about the top end of our revenue range for '21. But what I find, I guess, interesting is if I look at projections for Dover revenue outside of '21, it assumes that this is a recovery snapback and that the projections outside of '21 go back to the 3% range, which, to me, is at minimum 200 basis points lower than the on-the-run average of revenue growth and that doesn't take into account that we spent $350 million on M&A last year, which is addition to that. So Dover didn't shrink a lot. We actually improved our margins last year. Sure, there's going to be certain businesses that snap back to a certain extent. But the ones that really got damaged, now we don't get the full year credit for that because it really is levered in the second half of the year.

I see. So the point is there should be some maybe carry over, if you like, into '22, as you put it. It's perhaps not realistic that the growth immediately drops down sharply on December 31.

I just don't see why the on-the-run revenue projection for Dover is in the 3-ish percent range. It's illogical. The portfolio itself should grow mid-single digits plus M&A.

Thanks. So it sounds, per your comments just now, as if you're fairly satisfied with how the Dover portfolio performs operationally in the downturn. Maybe just confirm that that's the case. And also, I suppose this feels like a big year for Refrigeration & Food Equipment perhaps to prove its place in the portfolio, show what incremental margins it can do in a good revenue year. Maybe help us understand how high a buy you've set for that business in terms of earning its right to stay inside the portfolio.

Well, if you worked here, you would never know that we were satisfied with the margin performance. But I -- to be fair, I think that we are very pleased with the margin performance in '20, considering the fact that we've increased the margins modestly despite having all the complications that we had due to COVID, not just the demand function. Look, I think that the portfolio over the last couple of years is clocking the way that we would like. We would expect to be able to improve margins by 100 basis points a year. We were actually running in front of that, significantly running in front of that since 2018. Yes. So I think we've got, I think, the right toolkits, and I think that we've got the right management team that this is something that we don't expect to run out of gas for the foreseeable future in kind of that journey. As it relates to Refrigeration, sure, this is a big year. I mean, this is going to be the first year in a long time that the revenue projection is to go up. We've taken a lot of cost out. And we've fundamentally changed how the business operates. I guess that's the way I can put it, by significantly reducing the amount of labor content in the cost of goods sold. So if you go back and take a look at the margin in the 2015 -- '14, '15 time period, I mean, it was in low double digits. So 11%, 12%. We expect that we can beat that at similar revenue. So the target that we have for 15% is real and it's doable. It's purely two things right now. If the backlog remains where it is today, and we continue to execute, I mean we can see the line of sight getting there.

And Fueling Solutions may be in for a tough year or 2 in terms of very low growth, and there's some mix headwind on the margins from that EMV drop off domestically. What sort of measures are you using in trying to ensure margins in Fueling can expand this year and next?

Well, look, if you remember the presentation that we made, I want to say it was October, November last year, we actually, for the segment itself, we expect to modestly grow despite this EMV headwind issue that, I guess, in another year or so we can stop talking about. Look, the portfolio was a lot more diverse than I think that the market gives it credit for. And I thought that we had done a pretty good job of going through that. But I -- but if you've got a competitor that's got a different geographic weight to it, then all EMV headwinds are not equal, number one. Number two, look, we get it in terms of the exposure on the above ground pump side of the business. We're working actively to diversify the revenue stream to make that less. We just closed an acquisition at the -- I think, on the 29th of December, which is ICS. That is a software-based company that basically hooks into controlling the car wash portion of the business. So if you think about the presentation we made about controlling the ecosystem for payment at the pump, this is the same thing on the carwash side. It's got the same benefits in terms of -- it's got a certain EMV play to it. Additionally, it's got loyalty payments. You can hook in diagnostics in terms of the performance of the operating units and you can dispatch service. So it's got some kickers in terms of parts and everything else. So we get it -- let's discuss, I mean, over the long term of this business, I think that there's a view that EVs are taking over the world, and this is a falling knife. This is a retail operations play, not necessarily a gas station pump business. We believe that we've got significant margin headroom embedded in the business and that, over time, we can expand through the ecosystem and turn this into a significant cash engine for the next 15, 20 years.

Thanks. And you mentioned that 100-bps-plus margin expansion goals, firm wide. How confident do you think you are around that 20% segment margin goal, medium term? And it sounds -- it makes it sound easy, but I know it isn't. That $50 million annual productivity number that you've been able to generate and are targeting for this year, is that something people -- investors should feel confident they can dial in for the foreseeable future?

Sure. Look, it was larger this year. So we actually beat the number in '20. So we put another one out there for '21. I fully expect to beat it again. So look, I mean, just if you go take a look at the total amount of COGS in this business, and you go take a look on our balance sheet of the amount of fixed assets we're carrying around, there's ample opportunity to continue -- forget just all productivity at the plant floor level. There's ample opportunity to continue to intervene in our fixed cost base for multiple years. I think that it's taken us a little while to build up kind of our core pillars, if you will, to attack it in a variety of different ways. We've done so. So I think that this notion of waiting for Dover to get to the end of the year to put some number out there and then I can add this to whatever my revenue growth rate. I'd like to get away with that because I think that, that's just fundamental in terms of what we can deliver in total margin expansion.

In that 20% number, that's based on, as you said, a mix of sort of peer benchmarking, looking at the fixed cost at the company, reviewing the operational changes already done in the last 2.5 years, all of those types of things?