Dover Corporation (DOV) Earnings Call Transcript & Summary

Welcome, everyone. Good morning. This is Andy Kaplowitz, U.S. sector Head of Industrial Research here at Citigroup. We're really excited to have Rich Tobin with us from Dover Corporation. I've got to know Rich over the last several years, and Rich has done a great job with Dover. He started as CEO in March of 2018. Company's already come a long way, but the good news is we think there's still lots more room to grow and create shareholder value.

So Rich, let me start off with a bit of a softball. I will acknowledge that I read the transcript of your conversation just yesterday. And so when we're thinking about sort of the bookings environment currently, it seems like you're reasonably positive. Things have turned, and you kind of talked about how customers are sort of wanting to get in line. Supply chains are sort of tight. And you did mention even that you thought that maybe even the high end of your revenue range for '21 was attainable. So maybe you can talk about at a high level the current environment, how strong this recovery is, maybe put that into context a little bit, given sort of what seemed like pretty global -- tight global supply chains?

Sure, Andy. And happy to be here. Look, I mean, I'll give you an update. I think we closed the year with very strong bookings. I mean I'm sure we can go through the individual segments in the Q&A. But just in totality, bookings are strong. The update that we have is January is closed, obviously, and bookings were up across year-over-year -- comparable bookings were up year-over-year in all 5 segments. We've got particular strength, as we discussed at the end of the year, in Refrigeration. The Pumps & Process Solutions had a great year in '20, has continued to clock reasonably well. And we're seeing Fueling Solutions is doing well. So that's all part and parcel to this issue of the April time line for EMV compliance, which we're sure we're going to get to that also. So look, overall -- but having said that, we've got a few portions of the portfolio that are back-end loaded to the second half of the year. Our exposures into capital goods, it's going to take some time to recover. We're doing well on the non-muni portion of Environmental Services Group. VSG bookings are picking up quite well. So it's a bit still of a mixed bag. But overall, the reason that we feel -- look, like anything else that we make forecast of the year, there's a little bit of estimation that's going there. And to the extent that we can get in front in Q1, that's money in the bank because we expect, as always, from a seasonality point of view, to have good Q2 and Q3. In relation to why the bookings were happened, well, part of it is an economic recovery for sure. I think that part of reporting so early and going first, I had the nerve to bring up commodity cost inflation and some stickiness in the logistics supply chain, and they both are true. That's not to be taken as kind of a get-out-of-jail free card where we give out revenue and EPS guidance and then say, "But by the way, commodity price costs are going to be just" -- you're not going to hear us blame that through the year. That's embedded into our EPS and revenue guidance for the year, but it's a fact. And I believe that it is driving some of this kind of early backlog build is that our clients are recognizing that price increases are coming on the back of raw material costs. And logistics constraints are there, and you don't want to be taking your chances of -- the normal cycle has been if I order 3 weeks in advance I'm going to get it. That's not necessarily the case. So I don't believe it's -- I don't want that comment to be construed negatively. I don't believe that here come the bookings, and there's some air pocket. I think that the bookings in total are healthy. They just think they're extending a little bit to accommodate these 2 factual drivers that are building on right now.

So Rich, before we get into the segments, I did want to ask you briefly about the regions and the context of lots of your peers. Lots of industrial peers talked about strength in China. And you have the issue of the regulatory mandate comps, which have been tough for you all year last year. And so China was down. But when you look at China overall, Rich, do you expect a better year here in '21, whether it's on the Retail Fueling side, whether it's on the Printing & ID side, just out of curiosity because that was the one thing that stuck out to me as a little slower than other companies?

Yes. I mean, the 3 biggest businesses that we have for exposure to China, we touched on them, is Fueling Solutions, Printing & ID, and then Maag, which is part of Pumps & Process Solutions. And Printing & ID and Maag both had good years in China. I think that -- there was pandemic early in the year. So you had, at least in the Printing & ID side, less of equipment sales. But in consumables, they did very well throughout the year. And the equipment started picking up in the balance. The second, Maag, those are long lead time projects. They were delivered. They actually had year-over-year growth, I believe, in China. With Fueling Solutions, which was just coming off a couple of real great bumper years, quite frankly, in the 2018, 2019 time frame, we called it out in the beginning of the year the guidance. It's been slow on the pickup. So it's not a question of losing share or the domestic producers picking up share as opposed to the nondomestic producers. It's just right. We're in a little bit of a CapEx lag in China with the big NOx in terms of the retail build-outs, if you will. So I think it's temporal. We don't have a lot built in, in terms of growth this year baked into our forecast. So I would consider it to be upside, quite frankly.

And so since you mentioned the NOx, I'll just ask you, like obviously, you've seen commodity prices rise. We just talked about it. Do those guys turn? Or is it like do they make decisions once a year and they just kind of sit there for '21? And obviously, you've got an oil and gas business in Pumps & Process, too. Like does that business start to turn, too? Like what are you guys thinking?

Okay. Look, in terms of the NOx, I think, as a big integrated oil makes separate decisions about CapEx between, especially the ones that have retail operations in terms of what they do upstream versus what they do in refining, what they do in retail operations. So I don't think -- I think the upstream side flexes with the change in the commodity costs, less so on the downstream side because those tend to be longer-term decisions about building out infrastructure and more. So I think it's just -- at the end of the day, I think like any other company, there's investment cycles across the portfolio, and there was just less money spent on retail operations in China, in particular, during that year. In terms of Pumps & Process Solutions and our overall -- look, at the end of the day, we don't have a lot of upstream exposure at all. I think it's less than 5%. We do have exposure to midstream, both in Pumps & Process Solutions, on the pump side of the business, and the Precision Components business. And Maag, I guess, as a downstream, has got plastics and chemicals exposure at the end of the day. Look, I mean, I think that the oil and gas has been under-invested for several years for a variety of different reasons. I don't think -- I think it would have been naive to think it could stay that low. But at the end of the day, I don't think that we've got -- it's not a tail wagging the dog. So to the extent that there's some investment that goes into that particular sector, I think that's good for us, but I don't believe -- we never shrank that much as it was -- as investments came down. And so it's not as if we're levered -- overly leveraged from a portfolio point of view. I think we'll take it where we can get it, but I don't think it's really going to wag the tail or wag the dogs so to speak.

And then just following up on sort of Engineered Products. You talked about, obviously -- you've got a portion of Environmental Services that's doing well, which you've talked about before. Like do you see evidence, Rich, that some of this CapEx-type businesses are starting to come back as we turn the page here in the calendar? Or is it too early still for that?

I think -- let's take them one by one. I think that Environmental Services Group, we took down production at the half year mark. I think it was the right call to make just because of working with our private clients and then just taking a read on the municipal situation of the service that I think that our private clients rightly sell because of pandemic issues basically slowed down their CapEx, but that has picked up nicely again going into the year here. So we're booked out well into Q1 in ESG, and it's not just truck bodies that we do. We also have a relatively large compactor business, and that's levered towards all of this delivery at homes, a lot of compactor volume is cardboard at the end of the day. So that part of the business has been doing reasonably well also. So we feel good at that business. We'll have tough comps in the first half and some pretty easy comps in the second half. So overall, we think we'll have a decent year. VSG, on the vehicle services side, really suffered last year. We are leveraged somewhat towards Europe. So we took it really early. A lot of our production is in Italy. Last year, we had a great third quarter as the economy began to open up. Yes, our expectation there is that VSG business will be the fastest-growing portion of the Engineered Products segment. We're doing a lot of really interesting things outside of yield changes in vehicle is around ADAS and the like. So I think that we've got not just the core business coming back from a downturn, I think we've got a lot of interesting new products that we're launching there, in particular.

So one -- just one other thing I would react to from yesterday, I thought, was a really interesting comment. Your skepticism around the street's 3%, which, by the way, Dover is one of my top picks, and I have 2.8% for next year. So I'd like your skepticism. But like, I guess, the way I would ask you, Rich, is I think the problem that we have on the sell side is we worry about businesses like refrigeration or even retail fueling where we think of them as sort of longer-term, slow-growing businesses. But clearly, maybe you don't or at least -- so I don't -- I'm trying to put words in your mouth, but that's why I'm asking the question, right, is, do you think that, ultimately, either all of your businesses or maybe it's the combination of your businesses, it really should be mid-single-digit growth, and that's kind of why you said what you said yesterday?

Well, look, I mean, at the end of the day, it's -- I think that -- if I think back to 2018 to where we are now, I think that we're getting credit for the margin expansion and the ability to extract synergy across the portfolio. So not displeased with that. I think -- but it has been a reoccurring issue in terms of revenue growth outside of the guidance cycle, has always been a problem. We -- every year, we clock in at least into midpoint to top half versus our competitive base in organic growth. And every year in the forecast period, the forecast is bottom quartile growth. And it's happening again for '22, and I don't know whether it's a communication issue. Look, the bottom line was, I think that we carried around the negative growth in Refrigeration. I think that, that business was looked at overly negatively. Now we're projecting that business to grow high single digits, if not double digits this year. And we believe that this is a 2- to 3-year cycle that we're entering into in terms of what the growth trajectory is. Unfortunately, and part of the reason that we did the special presentation on Fueling Solutions was this uninvestability of the oil and gas complex, black hole, is now sucking retail operations right into it. And I -- and look, I get this whole notion of EMV headwind. We've discussed it ad nauseam. I mean we call it at $50 million some time ago. We just invested into that business inorganically. On December 29, that mops up $40 million of that revenue headwind. So it would have to be a significant negative growth rate in '22 to pull down the entire portfolio into the 3% range. And I just think that, that's -- if you look at the CapEx plans for our retail fueling customers, which are available publicly, they're actually quite robust, right? We believe that retail fueling is going to go through a large consolidation phase. And if you look at the market structure and what's happening, there's a lot of very small retail operations that are privately owned, and go take a look at what the marathons and the speedways are doing and what they do as they consolidate those operations. So I think there's a -- I think it's overly negative on Fueling Solutions, and we're just not getting credit, a, for the organic growth rate that we've done. Look, I've only talked about my tenure for the time that we're here, coupled with the fact that we believe that we're cycling up on the Refrigeration side.

And Rich, so like, just following up on that, like, when you think about retail fueling as you go into '22 and beyond, like when you step back, you see CapEx plans of -- not the 1% to 2% that you're going to grow in '21 because of EMV, but mid-single digits, again, something like that as you go forward.

Yes. Look, I think that the CapEx is not overtly negative despite this EMV runoff, which, by the way, historically, we've dealt with in the past because EMV was done in Europe some time ago. And then for whatever reason, because there was a North American phenomenon this time, it just became overly important. I believe, again, that it's this issue of EVs are taking over the world. And somehow, this business is on a falling knife curve. I don't believe -- I don't believe it, number one. And part of the reason we did the presentation is that less than 40% of our revenue stream is for gas station pumps. So there's a lot more going on in that particular segment. Besides, no matter what you want to think about the number of gas station pumps that are out there and what happens to the capital base, we've got a lot more to offer there. I think that we can do a lot better in terms of service parts capture. And we can do a lot better in terms of reoccurring revenue streams. Part of the reason that we bought ICS was it's payment and monitoring of carwash, which is the fastest-growing segment within retail fueling operations. So I think that there's a negative thematic around the oil and gas complex. And unfortunately, it's made its way into retail operations. And I think that, that's -- I think we're realistic about the prospects of the business, but I can't see that being so overtly negative that drags the entire portfolio down into low-single-digit organic growth.

Yes, very good color. And I think right before you became CEO, Dover bought Tokheim, right, which was pretty significant in China, right? So like that's kind of why I asked you the question before. But you've pretty overweighed China versus your main peer that we all know about. And so as you go forward, I would imagine there's good opportunities there. Obviously, it's been tougher in 2020, but maybe any more color on sort of China penetration and/or growth just out of curiosity?

Yes. Look, I mean, the build-out of greenfield growth outside of kind of the consolidation issue that I touched on, which is more of a North American phenomenon, is in Greater Asia Pac, and we're going to have to fight it out with our 2 main competitors, 1 Japanese and 1 North American-based foreign market share in both China and India, which are projected to be the fastest-growing markets. We're going to have to be smart about it because competition is tough. So margins aren't as high as they are in North America. But I think in terms of what we've done from a product development side in North America, I think that we've got a leadership position, and I think we're doing a lot of work in terms of our cost base, which has been reflected in our margin performance over the last -- I mean, we've increased margins in Fueling Solutions by 500 basis points in less than 2 years. So I mean, we're doing a lot of heavy-lifting on the international operations to make sure that we're cost competitive.

So let me follow up on Refrigeration in the sense that you mentioned sort of 2- to 3-year cycle. And I mean, I know you understand our reticence given what Refrigeration has been through over the last few years. So maybe talk about why you think -- I mean, we can get into Belvac and sort of other stuff going on in Refrigeration, which I would guess people have a lot of confidence in those businesses. But if you think about sort of the core retail business, I guess, the concern is that CapEx in the past was so muted that it's hard to believe that we're in this sort of robust cycle. Do you think it's -- the pandemic has changed it? Is it Dover that's changed? Like combination of all that stuff? Like what gives you the confidence in a 2- to 3-year cycle? Because trust me, the 2- to 3-year cycle in Refrigeration and -- comes with really good margins, your stock is very undervalued, in my opinion.

Well, look, I mean, I think that when we put the margin targets out for it in, I guess, late 2018, everybody -- there's a believability issue associated with that, and I get it, right, because there's a lot of heavy-lifting to get there. We did 12% margin in Q3, which is kind of a peak delivery period. So it was a good proxy to say what kind of progress we've made in terms of our production costs and costs to goods sold and the like. And then we said, look, in order to move it up into mid-teens, we need an amount of volume, and our backlog now is a pretty good management tool that we have because this is a very short cycle business, generally speaking, which is reflected in its margins. To the extent that we can build the backlog, we can arguably run more efficiently and drop some of that efficiency to the bottom line, number one. We had expected the business to grow in '20. We fully believe that it would have grown in '20 if it was not for the pandemic and our inability for access rights, but what they did was 2 things. It's basically that deferment of capital refurbishment now is beginning to build up in the system, number one. And I think the good news of what happened is there wasn't a lot of capital being spent on kind of the infrastructure base because food -- big box food retail was struggling with this whole Amazon buys Whole Foods. And what happens with home delivery and the struggle of having to adapt to that, I guess there's always good things that come out of bad situations, but I think that the way that big box retail has responded to order online and pick up at the store has been a very successful business model. The economics work as opposed to this wholesale home delivery of 76 bananas in a box. So they're feeling a lot better about the kind of mixed model that they need to have between your typical combination of fresh produce and frozen goods and then takeaway model, which we're exposed to all 3. We did the refrigeration and freezer units for frozen. We do a lot of kiosks for fresh produce and grab-and-go. I mean, we're the #1 supplier to the -- to Amazon's grab-and-go format store. So I think that there's a lot more confidence in terms of capital deployment now, now that the business model has kind of gone away from Amazon is going to upset the applecart, so to speak, there. So -- and then having said that, some of these big national chains, you can't refurbish all your stores simultaneously. So there's a schedule that goes over multiyear period where you're doing 1/3 of the stores in this state and you move around. So we're working with our clients with that. So that's kind of the general refurbishment volume that we've been looking for. It just got a year delayed because of COVID. On top of that, we've got a couple of really interesting initiatives going on. I think that this -- on the system side, this legislation in California of moving to CO2 is very important. We are a leader in terms of the technology. We've got material market share in CO2 systems in Europe. We brought that technology here. So we believe that we're on the front foot of adapting to that legislation, number one, in California, but it's all around this whole ESG. And are you going to -- if you're going to refurbish it -- if you're going to refurbish your systems in California and move to CO2, are you going to have a special system in California or you just going to start adopting in wholesale? The likelihood and based on what we can see from our booking rates, it looks like it's going to be adopted outside of being legislated in. And finally, we've talked about this issue with Cooler Screens, which is a partnership that we have and a company that we're invested in that does the digital screens. This is the big rollout year for Walgreens, and it's in test with a variety of other big box retailers. And it's a significant amount of door volume that we had not had previously. So I think that overall, we think it's a multiyear trend, but it's not just a refurbishment. We've actually been working on a variety of other interesting revenue streams that we had not had in history.