Dover Corporation (DOV) Earnings Call Transcript & Summary

Good morning, and welcome to Dover's conference call. Speaking today are Richard J. Tobin, President and Chief Executive Officer; Brad Cerepak, SVP and Chief Financial Officer; Kevin Long, President of OPW Global; and Andrey Galiuk, Vice President of Corporate Development and Investor Relations. [Operator Instructions] As a reminder, ladies and gentlemen, this conference call is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Andrey Galiuk. Please go ahead, sir.

Thank you, Gigi. Good morning, everyone, and thank you for joining our call. This call will be available on our website for playback, and the audio portion will be archived for 3 months. Dover provides non-GAAP information and reconciliations between GAAP and adjusted measures are included in the presentation materials or earnings releases and investor supplements for the applicable time periods, which are available on our website. Our comments today will include forward-looking statements that are subject to uncertainties and risks. We caution everyone to be guided in their analysis of Dover by referring to our Form 10-K and our most recent Form 10-Q for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law. With that, I will turn this call over to Rich.

Thanks, Andrey, and good morning, everyone, and thanks for joining us on this brief call. I'll begin by providing a summary view of the acquisitions we just announced and what they mean to the Fueling Solutions segment and Dover portfolio. And then Kevin will give you more details about the businesses and how they fit within -- and fueling solutions. Let's begin with a summary on Page 3. First, we are excited to announce 2 acquisitions for a total cash consideration of $926 million with one of the transactions providing tax benefits valued at approximately $35 million. We have been purposely evolving our fueling portfolio towards less reliance on capital spending in traditional fuels, and we are making another meaningful step in that direction today. These acquisitions enhance our position as a leader in clean fuels where we already participate with the compressed natural gas fueling solutions as well as LNG and hydrogen fueling solutions supplied by the recently acquired LIQAL. These acquisitions also establish a position for us in an attractive and well fitting cryogenic industrial gas adjacency. We are acquiring highly attractive businesses that delivered double-digit growth in the past 3 years. The critical nature of the products, their technological differentiation and intellectual property positions drive attractive margins, which will be accretive to both Dover and our Fueling Solutions segment. We expect to capture material synergy opportunity that will further expand margins, which, coupled with rational acquisition price, is expected to deliver attractive return on invested capital in line with our targets. OPW, the operating company, will operate these acquired businesses experience and acquisition integrations. And we have full confidence in Kevin and his team's capability to drive value with the support from our corporate centers of excellence. We see a very robust growth and profitability in our Fueling Solutions segment, which we detailed during the Investor Day last year. We expect the segment to post low single-digit organic growth in '22 despite a roll-off of EMV demand in North America. Recent acquisitions are expected to improve organic growth profile and result in an all-in revenue growth of approximately 18% to 22% next year. We will continue driving meaningful margin improvements on volume leverage, product mix and synergy capture for recent acquisitions. Our purposeful capital allocation strategy is delivering results. We expect to complete 9 transactions in 2021, valued in aggregate over $1 billion, which is most active year on an M&A front since 2016. These 2 recent deals are preliminary expected to drive $0.30 to $0.35 of adjusted EPS accretion in 2022. But we will refine these estimates during the annual results announcement based on the timing of the synergies and integration costs as we begin integrating the acquired businesses. We recently completed the divestiture of Unified Brands and also exited a minority stake retained as part of a past divestiture. We will use these proceeds, cash on hand, and approximately $150 million of commercial paper to fund these acquisitions, resulting in our balance sheet has substantial remaining firepower. And our acquisition pipeline remains robust after the completion of these 2 deals. Slide 4 provides a bigger picture of our inorganic priorities and activities that you've seen before. We have been busy and deliberate in our inorganic endeavors during the past few years. The left hand of the slide shows our specific priorities for inorganic capital deployment, which we articulated in 2019 as part of our portfolio strategy update during the Capital Markets Day. M&A will remain an integral part of our strategy. Moving to Slide 5, our inorganic and partnering activities in the Fueling Solutions segment have been focused on building our digital business, expanding participation in attractive and logical adjacencies and building out the clean fuels offering, where we have a strong right to play and a path to grow with our customers as the world decarbonizes. The acquisitions of Acme and RegO, which we announced yesterday, represent the next meaningful step in the evolution of the Fueling Solutions portfolio. On Slide 6, we quantify what all this activity means to the portfolio and how we expect to drive growth and profitability from here. The chart on the left shows the diverse sources of revenue in this segment and their evolution from 2018 to 2021 pro forma for the recently completed and announced acquisitions. In 2018, fueling dispensers and underground equipment, the most capital levered product offerings, accounted for the majority of the segment sales, which will now be under 40% with dispensers accounting for less than 30% of revenue. Outside of the capital equipment lines, we have been focusing in growing the aftermarket and digital businesses, which are less levered to capital expenditures and offer more repeatable and stable long-term stream of revenues. In terms of adjacencies, we were an early mover in the car wash space, where we are now top 3 North American supplier with the broadest multi-category product offering catering to this growing industry. These 2 acquisitions, coupled with the previous addition of LIQAL and our organic developments in the clean energy space, drive clean energy revenue, with a pro forma 16% share of segment sales, together with the cryogenic gases adjacency. Overall, growth rates in these lines of business provide a path to long-term single-digit -- mid-single-digit organic growth that we target for this segment. Additionally, we expect continued margin improvement in the segment driven by favorable mix from growth in higher-margin products, our ongoing initiatives as well as synergy potential on recent acquisitions. Finally, I'll wrap up my portion on Slide 7 with a summary of our outlook in the Fueling Solutions segment. We remain very confident about the long-term growth outlook. Near term, we still expect to grow organically next year, and acquisitions will further augment the top line strength. This segment has delivered solid 500 basis point margin expansion over the past 3 years. Last year, we outlined initiatives expected to deliver an additional 300 basis points of margin enhancement, recent acquisitions add additional opportunities for margin expansion from synergy capture, which we'll pursue rigorously. We expect steady margin improvement in the segment in the coming years. Lastly, portfolio enhancement in Fueling Solutions will remain a priority. We have significant installed base of retail fueling equipment, which will provide us decades of consumable revenue and regulatory-driven upgrade potential. In addition to this, there are multiple opportunities across vectors and adjacencies we already identified, and the acquisitions open the aperture in clean energy and cryogenic gas adjacencies. We remain very positive about the outlook for this business, and we look forward to updating you about our progress. So let's pass it on to Kevin, the guy that's going to get all this done. And he can talk about the businesses that we have acquired.

All right. Thanks, Rich. Let's turn to Slide 8 to discuss our 2 latest acquisitions. Both Acme and RegO are well-established providers of highly engineered mission-critical components and services that facilitate the production, storage and distribution of cryogenic gases in liquefied form under ultra-high pressure and ultra-low temperature. These demanding applications drive exceptionally high performance, safety and compliance requirements and create natural moats given their established track record. Acme, which is based in Allentown, Pennsylvania, is expected to generate about $70 million in revenue this year. Its key products include vacuum jacketed piping, valves and manifolds. The business maintains entrenched direct relationships with all major industrial gas producers, storage and transport equipment OEMs as well as end customers of industrial gases with exposure to some very attractive high-growth end markets that enable the company to drive double-digit organic growth over the past 7 years. RegO, which is based on Elon, North Carolina, is the de facto industry standard for valves and safety devices for storage and transport of propane in North America, also with sizable and growing offering of components for industrial cryogenic gases and liquefied natural gas fueling applications. RegO is expected to generate over $200 million of revenue this year. RegO sells through a combination of distribution as well as direct to OEMs and end users. And RegO's core business has a long-term track record of growing above GDP with very limited cyclicality and as cryogenic gas and LNG fueling businesses provide attractive forward growth exposures. The product offering and customer relations in both businesses are highly complementary. And we're excited about the growth prospects and efficiency opportunities that we can drive in the future. Moving to Slide 9. I'll expand on the strategic and financial attractiveness of the acquisitions. First, both businesses serve blue-chip customer base across diverse end markets with clear growth drivers and low cyclicality. As is true for OPW and many of the Dover businesses, requirements for product safety and compliance are extremely high and often regulatory-driven, creating favorable product loyalty dynamics. From a business model perspective, both businesses fit well with OPW and the broader Dover. They both supply small critical components into larger systems, often co-developed with original equipment manufacturers and employ multiple routes to market that include distribution and end market as well as sizable aftermarket and replacement demand. Both are well-established leaders in their niches and provide recognized technological edge and long-term track record for delivering growth in excess of GDP. The deals are financially attractive. And our returns are driven by high confidence growth and synergy capture outlook. Slide 10 highlights some of the attractive end market exposure for clean energy. Over $200 million in sales will be generated from clean energy applications, such as liquefied petroleum gas, liquefied natural gas, compressed natural gas and the hydrogen economy, which cater to a variety of residential, industrial and transportation end users. Another $100 million in sales is driven by a diverse set of cryogenic gas applications from gas production to end users like food and beverage production, space launch, cryopreservation and life sciences, electronics production and high-power computing. All of these end markets have well-understood and time-proven growth exposures. On Slide 11, we'll provide more detail on the clean energy applications that we're scaling up through these acquisitions. LPG is RegO's core business and has delivered steady low cyclicality growth in excess of GDP over the long term with robust future growth outlooks. In residential applications, which drive about 60% of RegO's propane business today, propane is well-established source of clean energy in colder and rural geographies benefiting from a shift away from heating oil due to environmental sustainability and cost considerations. Additionally, the residential business is benefiting from tailwinds in secondary applications, such as standby generators, pool heating and off-the-grid homes. Propane is widely used as a fuel in a variety of industrial processes from material handling, transport -- and transport. Industrial, agriculture storage and transport applications drive about 40% of RegO's propane business today, notably, the recently adopted infrastructure investment in Jobs Act earmarks grants for the development of propane infrastructure, among other clean fuels. RegO is the clear leader in North America propane market with a large and growing installed base driving strong replacement demand, a robust proprietary technology offering as well as entrenched OEM relationships and unparalleled and exclusive distribution network. LNG is a high-growth budding industry that's served by both RegO and Acme. The primary focus is on components used in LNG-powered truck tanks and fueling sites, where recently acquired LIQAL is also a leading player in Europe. The primary driver here is the adoption of LNG as a fuel for long-haul trucking, which is currently the only viable low-carbon fuel available to OEMs and fleets to drive compliance with tightening emission standards. In addition to a variety of government and other incentives, the increased cost of traditional diesel trucks due to increased emission requirements are making LNG an economically attractive investment for fleets. LNG-powered trucks are seeing continued adoption in China and rapid growth in Europe, where many prominent OEMs have adopted near-term and long-term goals for LNG as a percentage of new truck sales. The market for relevant components is projected to grow substantially on new truck builds with LNG fleets expected to multiply in size in the medium term as well as the build-out of refueling infrastructure across the EU. RegO has relationships with all key truck OEMs and suppliers of fueling trucks and enjoys near-exclusive positions in relevant product offerings across multiple truck platforms. We expect this business to grow substantially on market growth, continued innovation and product introductions and increased participation in the fueling site infrastructure build-out where our LIQAL business is one of the leading players. And last but not least, the hydrogen economy served by -- primarily by Acme is a rapidly evolving space. Hydrogen has been a buzzword for decades. However, the state of emerging technology as well as lack of resolve for energy transition has held back meaningful investment. That's changing. The industry is still far away from large-scale adoption of hydrogen, but it's already a viable source of fuel and select applications. And over the last year, has seen significant step-up in investments in this space. Legacy hydrogen uses have been primarily in fertilizer manufacturing and petroleum refining with new applications focused on mobility that drive most of the growth. As an example, one of Acme's largest customers is a well-known supplier of hydrogen-powered material handling equipment that's being rapidly adopted by marquee retail and e-commerce places and warehousing operations with significant runway for growth in that niche alone. Additional near-term uses are maritime shipping, rail transport, heavy-duty trucking and machinery, all applications where electric battery technologies unlikely to ever be a viable -- ever to be viable. And hydrogen offers a path to zero emissions fuel. Current estimates of total investment in new hydrogen infrastructure over the next decade are around $500 billion. And there are many near-term announcements, with a steady stream of announcements from industrial gas majors and other players about their near-term capital commitments to hydrogen. Hydrogen today is Acme's largest end market, and its products are primarily -- predominantly used in liquid hydrogen storage and transportation applications. Hydrogen is the most challenging of the 6 common industrial gases to handle due to smallest molecule size, lowest temperature and significant safety hazards in the event of leaks. Acme's proven and proprietary valve offering for this demanding application is a strong platform for continued expansion and growing in this niche. All in all, OPW and the broader Fueling Solutions segments are very excited about the prospects for our clean energy business and what we can do to build and expand on this product offering in the future. With that, let's move to a brief Q&A if there's any questions.

[Operator Instructions] And your first question comes from Andy Kaplowitz from Citigroup.

Congratulations. Rich, so given these recent acquisitions, just how much closer would you say DFS is to that mid-single-digit longer-term growth target you gave us last November? I know that at that Investor Day, you talked about low single-digit growth in core equipment, and you get to mid-single-digit growth through adjacencies in new markets. These acquisitions seem like a pretty big move to get you there. So what more do you need to do? Or are you already there as you go into '23 and beyond in terms of organic growth?

Andy, I think all in, it's 18% to 22% for next year, inclusive of the acquisition. So I think we're there. I think that doesn't mean that we're not going to continue to work on the product mix. I think that we've made meaningful progress in a short period of time if you look at the slide that shows the makeup of the revenues. But I think that there is additional opportunity to continue to work on that.

And then maybe for Kevin, you mentioned hydrogen is Acme's largest end market. So could you give us a little more color into storage transportation markets for Acme and maybe the potential TAM for Acme itself, market share positioning for Acme in that market?

The application, again, driven by a number of things and partnerships with industrial gas majors and some of the OEMs. And it's an infrastructure build-out as people continue to explore and invest in that hydrogen space. Everyone is trying to get their hands around what that TAM is with the growth rates that we're seeing right now in the different applications, and we'll dig into that more as we get into it. But we can provide a number, estimate of that maybe in the forward period of time.

Our next question comes from Julian Mitchell from Barclays.

Maybe just wanted to try and understand, one of the appeals of flow control in general is the very high degree of sort of fragmentation. But then it's also viewed as appealing when companies have a large presence in a given niche. So just trying to understand kind of where these 2 acquisitions fit along that spectrum in terms of how strong each of them are versus their respective peer sets in their sort of flow control niche industries.

Okay. Look, between the 2, RegO is the larger, more established player that interestingly was moving into cryogenic applications themselves. And Acme is really almost a pure play on hydrogen and cryogenic. So the attractiveness of -- which is higher growth adjacency. And going back to Andy's question before, we can talk about the amount of capital that's being talked about going that way. It remains to be seen. But clearly, we are convinced that there's going to be a significant amount of capital going into that space over time, which, by the way, we don't just participate in through fueling solutions. We also participate in it through our compression components businesses as our customers are working to convert their equipment to transport hydrogen as opposed to natural gas. But -- so one is a large, meaningful supplier into a marketplace with long-established relationships, very good distribution and a massive installed base. And the other one is in an emerging market that we've got confidence that is going to provide a high growth opportunity for us.

That's helpful. And then just my second question around Slide 7. You talked sort of in the center of the slide about the 200 basis points margin opportunity in TFS. Maybe just help clarify over what time period you think we see that. And in the longer term what's -- with the current portfolio inclusive of these deals, what the sort of typical operating leverage should be at DFS.

Here we go and into the spreadsheets again. I think that the 200 basis point runway is the roll forward from the presentation that we made last year. Clearly, we're struggling a little like every -- like most of our companies, a little bit with some headwinds on the logistics side and the product availability. But if we see through that, the on the run was going to deliver an additional 200 basis points. This only makes that target more attainable because of the fact that -- as we mentioned in the release that both of these businesses are accretive to the segment. How that fits into the greater consolidated, I don't know, Julian. I'd have to go and rerun the estimates and everything else. But the bottom line, it's why we put it in the press release. It's accretive to the segment, and it's accretive to Dover. So to the extent that we believe that these have good growth aspects than the -- and it's accretive to Dover, then the incremental margin should be at the upper end of the range for the consolidated entity.

Our next question comes from Steve Tusa from JPMorgan.

I'm going to stay in the spreadsheets. Sorry about that. You know when you give numbers, we're going to go through them.

We try to fill them out for you. But apparently, it's never enough. But go ahead.

Never enough. The EBITDA accretive, I mean, are you talking like mid-20s EBITDA margin? Like how far off are you guys -- are these things relative to where you are today?

They are not far from there. They get there with the full synergy extraction.

Right. And you said 7% of revenues and synergies, that's margin you're talking about?

Yes.

Wow. How do you get that much? And what are...

Just so our new colleagues don't get nervous at the acquired companies, a significant portion of that is backward synergies. And it's all part and parcel to what we have, an operating playbook in terms of back office services, some engineering offshoring. I mean we've got a variety of things that we can deliver to these businesses that allows them to spend a disproportionate amount of the management time on customer-facing activities and research and development. So kind of the noncustomer-facing activities is where the synergy extraction is going to come from.

Right. Because you're already -- Dover is already a kind of like a 20% margin. So I mean if this is accretive, then I mean you should be north of 25% when you're all -- when all is said and done on these businesses.

I surely hope so. That's the intent.

All right. And then one more for you. Why is this multiple so low? Like how did you manage to kind of -- for a business that looks pretty attractive and growing fast and at a decent EBITDA margin, I mean, why again such a good deal here?

I would say that Kevin probably made a compelling argument that it was a good home for both of these businesses.

Our next question comes from Mig Dobre from Baird.

I guess I wanted to ask a question on the LNG portion of the business. You talked about the opportunity in trucking, and we can appreciate that. But I'm also wondering about LNG by rail, right? There's been a ruling last year, and it looks like this market has taken off. Can you talk a little bit about what the exposure at RegO would be for that vertical and kind of how you're seeing that portion of the business kind of build out into '22, '23 and beyond?

I think I'm glad you asked that, Mig, because what I don't think is very well understood is that we have a material presence in the rail market. We had it for years in OPW. So Kevin, you can basically talk about it to a certain extent.

We view that as an opportunity when we look at the fit of these businesses across. It's not just in some of the things that we talked about with the end markets on LNG and trucking in Europe. But there's certainly a number of opportunities with LIQAL that we had mentioned, but our Midland business from the rail side as well as some other things on the cargo side. So we're really excited about the fit across and that being one of the opportunities that we are excited about. And we're going to continue to drive to really make these acquisitions a success for Dover.

Okay. And if you think about your product portfolio, thinking more from the standpoint of the OEMs or the gas companies, I'm trying to understand how important of a supplier you are becoming to them. And are there any other potential gaps that you could be sort of feeling as you look at the next 2 to 3 years through M&A?

Yes. That's another part that I think we highlighted here a little bit, but that's another aspect where this opens up a significant envelope for us to look at other opportunities within inorganic investment for the business. So I think you hit it right on to where there's other things that we'll be looking at to build out the portfolio. Specifically, there's going to be some things that we have in our funnel that we're taking a hard look at. We've got a lot of work ahead of us with these 2. But that's -- we're going to get right on to further building out our capabilities in these areas because we do see in very attractive spaces, and we're excited about it.

I mean the bottom line is one of the benefits of the acquisitions is that we get a very talented management team that's been -- had exposure to these marketplaces. So our expectation is that a lot of the ideas that we're going to get in terms of reverse synergy capture on the revenue line, which, by the way, we have not modeled anything that we've said about EPS accretion, about kind of revenue synergies. These are kind of stand-alone and kind of cost synergies. So we look forward to the dialogue once these teams get together. I think that the amount of opportunity that we're going to find combining the traditional OPW business with these 2 is going to be very interesting.

Okay. And last one, if I may. You addressed the cyclicality a little bit earlier in your prepared remarks, but I'm sort of curious here. Is there a way to frame the replacement cycle for some of these components? I mean how long do they typically last? I mean what sort of -- if you would a replacement annuity, are you kind of baking into your forecast as you're kind of looking beyond just sort of OEM large projects, that sort of a thing?

We have estimates on -- that's more of a RegO question than an Acme question just because of where they are on their life span. But I think rather than digging to that, Mig, I mean, you could schedule a follow-up call with Andre. And then we can kind of take you through what the estimates are.

And our next question comes from Nigel Coe from Wolfe Research.

Congratulations on the deals. Just on the cost synergies, coming back to that, the 7 points, would that be net of any investment spending that you're sort of planning for these businesses? And maybe just touch on what kind of investment spending do you think you can do to make these even better businesses?

I don't know yet, quite frankly. I think we've got some -- I think that what we've identified is what we -- is generally what we identify with key component companies that sell a significant portion of our revenue through distribution. I think that we've got an operating playbook that allows us to come up with some good estimates. What we need to invest to get those synergies, I don't think -- I think it's marginal at best. I think we've built the platforms to get that done. I don't know, and I don't think -- Kevin could opine on it. I don't think that we've got a clear understanding about organic capital that we'll deploy here. My instinct says it's probably going to take us 6 to 8 months to get a good understanding about what we'll do there. But to the extent that the prospects for future growth are what we believe that they are, then we'd be deploying capital. But I don't think it's going to be disproportionately a percent of revenue than which is common at Dover.

Yes. Okay. That's clear. And then on the revenue growth, you called out RegO as the middle-digit grower longer term. And Acme is high single digits. And obviously, that compares to very solid double digits for the last 3 years, I guess, the backdrop of pretty crummy end markets or just industrial growth in general. So I'm just curious, as we look at the accretion math for the next 3, 4 years, would you expect growth to remain for these 2 assets in a double-digit zone? Or do you think it's going to be more in line with that long-term number?

I think that we're comfortable with the long-term number. If anything, they're -- I think there may be a little bit understated, but it's hard to say at this point. I mean, clearly, the amount of capital that's going into cryogenic gases and CO2, I mean, the timing of that and at what point do we participate in that, I think, is somewhat in flux. But I think that what we put in the slides is the fair estimate over the medium term.

And our next question comes from Andrew Obin from Bank of America.

This is David Ridley-Lane on for Andrew Obin. Wondering sort of is there -- big industrial gas companies know that there is diversity of end markets on the industrial gas side. But wondering is there a level of kind of revenue concentration in with -- into those big industrial gas companies.

No. Given the size and scope of the industrial gas, the variety of projects that we use and, overall, the degree that we have from a customer to base, that's not a significant concern for us.

Understood. And then on the 700 basis point synergy target, it's incredibly early. Just wondering if you could sort of give a time frame or thoughts on the pacing.

I think that -- we knew that one was coming. We knew it in the prepared remarks. We'd say when we gave our full year results, we'll be able to refine the timing of reaching those targets, which is the reason that there's a range in terms of the EPS accretion for '22.

And our last question comes from Deane Dray from RBC Capital Markets.

A quick question for Brad. Just can you walk us through the tax benefit, the $35 million? Is that an NOL? What's the timing of the realization? Will it be like -- just the time. Is it over multiple years? And does that impact the 2022 rate at all?

Yes. No, it's over multiple years. In fact, that's a discounted present value of that stream that we get through the structuring of the deal, which gives us an asset step-up. So it's pretty straightforward, Deane. It's not NOLs.

Okay. Thank you, everybody. Gigi, you can close out the call.

That concludes our question-and-answer period and Dover's Clean Energy Acquisition Conference Call. You may now disconnect your line at this time, and have a wonderful day.