Dover Corporation (DOV) Earnings Call Transcript & Summary

Good morning, everyone. Again, this is Andy Kaplowitz. Welcome to day 2 of the Citi Industrial Mobile -- Industrial Tech and Mobility Conference. We're very excited to have you guys. We're very excited to have Dover Corporation with us. We've got Rich Tobin, who is the President and CEO, became CEO in May 2018. I know Brad Cerepak is in the audience. Brad has been CFO since 2009.

So Rich, I'm going to walk over here and maybe ask you a couple of short-term questions which I know you love, and then we'll get into some bigger picture things. So the first thing I just wanted to ask you is, you even as early as, call it, middle of last year, I think you were a little concerned about the macro, what you -- we might see into '23. But you also noted 4Q earnings that you have a constructive stance on 2023. So now we're 2 months into the year, would you say you're more constructive or less constructive on the macro? And are there any markets holding up better than you thought or worse than you thought?

Well, I mean, I think you can see from the guidance that we put out, it's relatively aggressive when you comp it against our peer group. But the bottom line, I don't think we're out of the woods yet, right? So you can see the volatility in the equity markets and we're in an unprecedented territory with the drawdown of liquidity and the availability of liquidity. So we think that we can navigate the environment, but the bottom line is -- I get some stick from time to time of not sitting here and saying, well, volume is going up forever and pricing is going to stick forever. But that's unpaid to be a risk manager at the end of the day. Right now, we have no reason to back off of our forecast for the year. But our stance is to be either opportunistic if we're rolling to the downside or have plans to deal with any headwinds that we see in the back half of the year.

That's very helpful. And then you talked about how you expect sort of North America developed over the year. You're watching to see how it developed. Anything that changes your expectations there? And then I would ask you, I mean, Europe, it seemed pretty strong for you guys, up high teens in Q4. China was down, but maybe you can talk about sort of Europe's resilience? Are you seeing anything after the Chinese New Year? What are you seeing?

Well, let's start with Europe. I mean we were positively surprised. So back to your original question, with all the gloom and doom about the economy in Europe and what's going on with the energy crisis, one would have said, "Oh, it's sounded to be very cautious in terms of the demand in Europe." But we sailed right through. So I think we posted 10% growth in the fourth quarter, if memory serves me. So it's been more resilient than what we would have planned for, but back to your other question, I don't think that we hunkered down that we weren't able to see is when opportunity was there. So that's kind of the same posture that we're taking around the world. Our China business in total is, I think, a little bit less than 10% of our total revenue now. So it was down for all the reasons we understand. I don't see it really inflecting meaningfully yet but that, again, it's not overly material to us.

Got it. And then maybe just one more question on orders. And I'm going to try to get this right, Rich, because there's a lot of questions, we're just going to ask one. So basically, what you said on the call is if you think at the end of the year, your backlog can normalize more or less back to sort of 2019 levels. And if that happens, I think the right math is that orders would be, call it, $7 billion, $8 billion versus $8.3 billion in '22, is that correct? And I know it's only been a short time since you reported, but are you continue to see normalization orders, like how do we think about supply chain normalization?

Aggregate backlog and number of orders in a diversified portfolio that someone thinks they can put into a spreadsheet and come out with an equation that solves for. We have all the internal information and we can't do it, right, because of mix and a variety of other things. So I would just have you go back and take a look at a chart that we put in our Q3 deck, which was a reflection of by segment of what lead times were, right? Because what we've been saying, I think, over the last it feels like forever, let's take, call it, 18 months to 24 months, that we thought as supply chain repair, that backlogs would come down because there was no need to order so far in advance. So rather than trying to get aggregate total backlog and extrapolating that into forward earnings -- forward revenue, it's the same calculation that would you have seen 2 years ago. If you've taken our backlog and extract into revenue, we would have done $10 billion in revenue in 2021. So I think everybody needs to have a little bit caution about the duolingo mathematics about orders and backlog. Having said that, and what we've seen is that backlog is coming down because of the fact, mostly because of that lead times are coming down because supply chains have been repaired. So what we expect is that lead times will slowly shrink down to what they have been historically, just in terms of lead times, but I'd be careful about extrapolating that into forward revenue.

Got it. But ultimately, this is more about supply chain normalization, then you're seeing some big drop-off in orders?

Ultimately, yes.

Okay. And then just -- you mentioned at the beginning, Rich, because you brought up the topic of pricing, right, when I asked you about the macro. So let's just talk about that for a second, like versus kind of when you first talked about it, like I mean, what we've seen as commodities kind of come off the bottom a little bit, it started to come up. I hate to say like this, but does that give industrial companies more of an excuse to sort of keep pricing higher? Like how do you think about price versus cost now versus kind of when you first started talking about worrying about price?

Price is more a function of demand rather than cost, right? So there's always a push and pull between supplier and customer in terms of the determination of costs relative to pricing actions that are taken place. But fundamentally, the bigger driver is demand. So if demand begins to slip, right, unless capacity is cut commensurate with that demand, then it's going to ultimately put pressure on pricing. Right now, I think we've got pretty robust expectation in terms of pricing as the component of our revenue growth for 2023, but I don't think that we're not naive to dynamics. So I just have trouble standing up and saying, you know what, volume price is never going to come down. I think that -- that again, like I said, I'm paid to a risk manager. And I think if we say publicly almost what we say internally to our operating companies that you have to be on the alert to try to manage this.

So Rich, I know you had a positive price versus cost down for this year. Are you sort of more or less constructive on that as we sit here in late February?

Well, look, at the end of the day, what drove a significant portion of the inflation early on in the process was raw material costs and logistics costs, right? Those led labor. So labor trailed those 2. What's come down since then is raw materials from their peaks and logistics. Logistics have come down significantly. Labor, which trailed, is not going away. So fundamentally, I've been doing this for a long time, once labor rates reset, they don't come down again. We can talk about what to do about that. And ultimately, that's -- you're going to have to grind that out with productivity at the end of the day. Commodity prices have come up a little bit on demand, but nowhere near where they were in their peak. But quite frankly, if you look at the price cost dynamic, we never priced for peak raw materials and logistics costs. We actually -- that was reflected in our margin performance until it rolled over. I'm not particularly concerned. Like I said, the concern would be if we're wrong about the macro, and demand begins to slip, then that's when there's a lot of heavy lifting, and then we have to take more drastic cost actions to buffer that impact.

But to be clear, as you've been working in industrial companies for a very long time, right? Labor, at least at Dover is a smaller percentage of cost versus raw materials stuff, right? So like generally, cost bucket is coming down if you look at backlog conversion and stuff?

Well, I think that from a portfolio point of view, we have investing and growing businesses that have lesser percentage of labor as a percent of cost.

Right.

So we still have some, what we would refer to as, assembly-related businesses. And in those particular businesses, we're spending quite a bit of money on CapEx to reduce the labor content as a percent of COGS.

Got it. And so maybe shifting gears, a couple of weeks from your Investor Day. I know you don't want to tell us everything about your Investor Day, today, although you can, if you like. But maybe a sneak peek in terms of like I think you mentioned on the earnings call that we're going to be surprised by sort of your changing mix and how it could lead to higher growth. And so I just wanted to ask you a little bit more about what you mean by that? Do you mean sort of -- because you've been investing in sort of these higher-growth businesses, we're going to go at the colder facility, biopharma connectors, CO2 systems. You talk about all the time SWEP heat exchangers. Like, is that really what you're talking about? Is that over -- since you've started over the last 5 years, you've just been investing in these higher-growth businesses, and that's going to lead to really a change in dynamics?

I guess the answer to that question is yes. There's been a variety of different things that we said that we were going to do. And basically, we're going to give you a report card and said, this is what we said back in '18, '19. Here's where we are closing '22, and this is what we think is possible to '25. You and I have discussed this many times before. I mean, one of the banging on the drum issues that we have at Dover is the complexity of the portfolio, makes it very hard for investors to understand what kind of the growth rates are of the individual companies and how that translates into the aggregate. And overall, what we tend to see is when we give out annual guidance, let's use '23, for example, then estimates for '23 will hover around what our guidance is for revenue, but invariably, for '24, will be bottom quartile, which based on our track record makes no sense because we've actually been better than average -- significantly better than average in terms of revenue growth. And I think that what we're going to do is try to unpack why we're capable of doing that and give everybody a closer look of what's possible in these companies. And sometimes it's just pure capacity investment, sometimes it's the success of R&D spent in previous periods. We've talked a lot about e-commerce. We've talked a lot about reoccurring revenue on spare parts and what we've done there. And so all these things don't apply to every company, but we'll give you some use cases of what's driving the margin at least by segment.

I think, Rich, even since you started, right, growth rate generally has been in the mid-single digits. So I mean, given the new mix, we should think about that kind of growth or better.

Look, I think that where our CAGR since 2018 has been 5%, like right on the money 5%. So that's not a realistic objective going forward, an unrealistic objective to go forward from here.

Very fair. And then just following up on that, like maybe just, again, you're approaching 5 years as CEO, right, and quite fast. How do you think about the underlying cyclicality of the portfolio? Like it's something that -- I think you came in and you sort of talked about simplifying, embracing the higher growth. But how would you think about Dover is still fairly diversified? Is it less cyclical since you got here?

There are pieces of our businesses that are cyclical industrials. I mean, if we wanted to kind of group them. But the fact of the matter is we've gone through different cycles in these businesses. We've had the EMV roll-off that everybody was throwing themselves on their swords about and a variety of different individual businesses that becomes a theme of well that's negative to growth and that's a problem. But without looking at the balance, the balancing effect of the rest of the portfolio in aggregate, we still have a CAGR of 5%. So I mean, I think that the narrative sometime gets dominated on I'm going to pick something that's going down without recognizing a lot of the work of what's going up. I think our investment strategy, both organically and inorganically has been heavily weighted towards the higher growth, higher margins portion of our portfolio, and that's what's driven that rolling effect on the revenue growth and the margin expansion. So it's a lot of different pieces, but we're not running away from the fact that we've got some businesses that go through cycles. We just don't think that they are proportionally large enough in the portfolio where the tail is going to wag the dog. I think that, that was taken care of back in the Apergy days, and I think we still kind of drag around that reputation unfairly.

And to that point, like I'll get a lot of questions still on retail fueling as I know you do, like you've invested in several acquisitions even just sort of around that. So maybe talk to the fact that like, I mean, people kind of -- and change the name to clean energy, people sort of look at that. But at the same time, the business is quite different now, right? And U.S. dispensers are a pretty small part of the company.

Look, if we step back for a moment, I'm a big devotee of Schrum Peter, right, of creative destruction. All of our businesses are at risk for technology change, customer trend changes and a variety of different things. So we were naive. We knew when we were basically harvesting profits out of that business during the EMV days, which, by the way, we took that business, I think, from 8% margin to 18% margin within a 24-month period, we knew just like everybody else knew after the thousands of questions about it, that one day that would roll off and that we needed to deploy capital to deal with that. And at the end of '21, we deployed a significant amount of capital into that segment, into kind of away from ice-related fueling into gas-related fueling, and it's been very successful. We didn't shrink in that segment last year because of that investment. I think we went through a little bit of a transition phase because of EMV roll-off on the margin side, but we expect over the next 24 months to inflect the positive again based on what we've invested behind.

And just since we're there, the outlook for those gas businesses and...

I believe -- we think gas is a winner. Not to say that -- where we don't have a presence in EV, we do. We've actually just launched a charger on our own for our customers. But we think that gas, whether that be LNG, propane, CNG, hydrogen are going to be long-term winners and we're investing quite heavily in a variety of different businesses behind that.

That's very helpful. And then so just shifted to margins. Again, you'll give us new targets in a couple of weeks. But do you think 25% to 30% incrementals are still sort of the underlying profile of the portfolio. Could you get more out of the businesses? I mean, obviously, you've been very focused on SKU rationalization. I know we'll talk about digital here, and maybe you can update us on that? Are there additional levers for margin improvement?

I think on average over the last 5 years, we're better than 35%. So we beat the target that we put out there. We think the mix is moving in the right direction, but we don't manage the portfolio strictly on margin, meaning that, let's take a business that's lower margin like refrigeration, for example. We're not going to beg, we're going to size that to maximize profitability, but we're not going to basically forcefully cut down on the revenue opportunity that's there to manage the incremental margin opportunity. So the margin -- I would expect the incremental margin targets that we'll put out there for '23 through '25 will be as robust as they were in the past and then it just becomes a question of what we give you in terms of what we believe is the inherent growth rate by the segment and then you can do the math because you can see what the gross margins are by segment.

So could you just talk about sort of your digitization, where you are in the process?

Sure. I think we were slightly under $3 billion in revenue. So starting back in '19 and '20 of being close to $0 billion, so $3 billion -- $2 billion? $3 billion? All right. So we made it to $3 billion.

$2 billion. $2 billion.

$2 billion. Our target is $3 billion. So we've got $2 billion moving towards $3 billion. We're never going to the -- 100% of the portfolio is not going to be on e-commerce because of -- we have a lot of engineered to order businesses that doesn't apply. I would say that we're 40% -- 30%, 40% penetrated. So we got a lot of -- we've got a lot of runway.

And then just -- I think I've asked you on the stage over the rest few years about fixed overhead rationalization, like you kind of put it off as maybe too strong a word, but maybe that it is kind of went happen given sort of the pandemic and such. So what does that look like going forward? Can that contribute to the incremental margins?

It's part of the playbook. And it goes back to your question about the life cycle of individual businesses, right? So when they're using up the capacity, it's 2-pronged, right? It's the life cycle of the business. So if the business begins to cycle down, then it's up to us to reduce the fixed cost of that individual business to protect the margins. And then it's a function of capital deployment where we take a factory. And through automation and a variety of other ways, we increase the capacity, then we can draw down the amount of fixed cost that we have by, in theory, 2 factories into 1. So we do a little bit of both of that. I think part and parcel of some of the restructuring that you saw in the back half of last year was us taking action on the footprint side of the businesses that we're cycling down somewhat. So that will continue, I'm sure, over the next 3 years.

And to your point, Rich, there just guys in aside, like you've gotten the company sort of "ready"; if the world slows down a little bit. That's what you've been doing, right, in some of the -- right? So you're pretty lean now, would you say, from a manufacturer and an inventory standpoint?

No, no. We actually are -- it's going to take us the first 6 months of this year to draw down all of -- back to this whole backlog logistics issue to drag -- we're not happy about our cash flow last year. But at the end of the day, it was a trade-off between having the inventory to fulfill the orders or -- and keeping the factories running on a sustained basis because the last thing you want, and we saw that back in the back half of '21 a startup and shut down of factories because of lack of components, I mean, you want to really smash your margins. That's the best way to do it. So we carried extra inventory basically for the last 2 years almost, and now we're in the process because of supply chain and logistics, repairing themselves that we expect to draw down our inventory meaningfully through the first 6 months, maybe 3 quarters this year, and that's why you see our cash flow target for '23 is quite robust, but all that is what got hung up in inventory in '22 is going to liquidate in '23.

I should ask you about that, Rich. Like so -- again, one of the key sort of metrics you focused on when you came in is getting that free cash flow margin as a percent of sales up. So how would you assess that? Obviously, '22 was difficult from, as you just said, but what are you doing to ensure sort of that you're back up into that mid-teens that you're actually guiding to for '23?

Well, the vast majority and the improvement has been margin driven. So we're doing work in working capital in a variety of different things out there. But I would say 70% of the cash flow improvement, this is before CapEx, let's eliminate CapEx, just like cash flow -- operating cash flow before CapEx. The vast majority of that is through margin expansion. So taking down carrying amount of inventories and improving cash flow is a year-over-year grind. I think that we've been doing a terrific job in the centralization of accounts payable and accounts receivable, but that takes years to grind down and its part and parcel. The real driver is margin and mix in terms of cash flow.

So I want to talk about capital deployment in a second, but let me just back up for a second because I think people have asked you occasionally about shoring or onshoring given sort of your U.S. focus. So maybe just what do you -- because I think you benefited from it. So like what are you hearing from your customers with respect to -- do you think we're early in the cycle of shoring, if you may? And maybe that's helping the industrial cycle? Or is that just kind of how?

Like overall, I think that we were the beneficiary, but this goes back over the, let's call it, the last cycle from '18 to '22 because reshorings actually started up before the pandemic and everything else. That cycle actually predates that because of labor arbitrage in China went away 10 years ago, but there was so much investment in fixed cost there that no one wanted to admit it and all it took was logistic costs to go up and then everybody woke up one morning. And now you overlay a little bit of geopolitical issues on top of that. So it's been coming. By and large, we are a making region and shipping region company with a fewer exceptions. So competitively, I think that we were the beneficiary of that trend over the last couple of years. Going forward from here, all the talk about chips and big strategic investments, that is coming, but those are 3-, 5-, 10-year investments. So it's not as if there's going to be -- I don't expect a massive inflection towards reshoring, but a gradual -- a gradual one, which is great because at the end of the day, that means CapEx going forward from here.

But do you see it in something like biopharma connectors or because people talk about in life sciences, at least some of your peers that you've seen more, do you see that helping that kind of business? Or is that best strategy?

The regulatory-driven businesses, which, by the way, is one of our -- one of the screens that we have of businesses when we look to go make moves inorganically. We like regulatory-driven businesses because of the stickiness of kind of winning the spec. In the biopharma business because of regulatory issues, it's not as if you can have very, very wide supply chains there anyway, right, because of the complexity of dealing with that regulatory authority. But overall, if there's regulations behind it, generally speaking, we like the business because it inherently makes switching costs more difficult.

Speaking of that. So when you talk about capital deployment, you made 5 acquisitions last year for $325 million. You still significantly brought firepower. You talked about that, but you kind of suggested it's hard to get a large deal done. So would you expect to be active again in '23? Is it easier in '22 than '22, same, harder like what you think?

One would hope.

Yes.

I think that '22 is difficult. We're not out there buying public companies. We buy private enterprises. And generally speaking, that private valuation trails public valuation. So -- because of missed opportunity costs, so to speak. So despite the fact the equity markets in '22 being difficult, private valuations kind of hung in there because everybody was holding out hope for '19 and '20 to come back again. I think now the realization of higher for longer and interest rates is starting to set in. So we're seeing a realization that multiples paid during the free credit era are now beginning to come down. So we're in a more proactive stance there. I think the harder part is now what is the demand function going to be going back to your first question, right? So we went from multiples being very aggressive because the cost of capital being so low, now to multiples coming down but uncertainty in terms of demand. So that's kind of a push and pull that's going out there, but my expectation is barring a significant slowdown in the back half of the year that we should be on the front foot for M&A in '23 relative to '22, which is kind of quiet.

And Rich, just when you came in, you said you kind of had to get the company ready for M&A, right? You have to sort of focus internally, then you got it ready for M&A, then you start to do it. So how do you assess performance of what you've done so far on the M&A...

Well, I haven't done it. So everybody that works at Dover, I mean the way that we do acquisitions, 99% of the time is not Brad and I sitting with investment bankers and chatting about economic theory, it's more bubbles up from our operating companies. Because generally speaking, we -- our businesses are in large TAMs with very few competitors. And largely speaking, those competitors are not public companies, 70% of the time, let's say. So our opportunities come bubbling up from our operating company because they're the ones they understand market structure far better than we will ever understand it. So we're -- look, at the end of the day, we're responsible at a center for capital deployment, but how we get our opportunities is -- comes up from the bottom. And that's a good thing because we don't tend to participate in a lot of auctions or public bids or anything else where sometimes valuation gets a little bit out of control.

And maybe related to that, I know you've talked about always having portfolio optionality. Obviously, you've taken some of these businesses that people have talked about and improved the margins pretty dramatically. So how do you -- you and the Board sort of think about it now, how do you evaluate it? Is it better market to sell? Like how do you think about that?

We have a very, very robust process internally about agnostic, strategic participation and valuation, where we go through every year, we look at our participation in the end market, what we believe the end market is doing, what we think the competitive base is doing. That's why we're not eating our own cooking to a certain extent. And in that analysis, we do on a 3-year rolling basis every year, I go back to them, we said about Schrum Peter before, right? We go back and say, sometimes, you know what, we're doing really great in this market, but this market is about to hit the wall. So maybe in those cases, do we monetize today, because the value we can't come up with a reason to preserve value over time. So we do that every year, and I share that with the Board. And I think it's a lively and honest discussion.

Got it. Would you expect activity on that front over the next 6 months to 12 months?

No. Well, I think what you're alluding to is what I said maybe at the end of the tail end of last year. When I came here in 2018, it was right at the time that we spun off Apergy. And so I show up. And the first question I get is what are you going to do about the portfolio? Because -- and I get it, like the new CEO, you're going to go throw something out with the -- throw the baby out with the bathwater because you got to do something the first you stepped in. We had a discussion about we thought that there was value creation opportunity within the portfolio that we were going to go through a period where we're going to concentrate on margin expansion of the tools that we had. And I think that when you see our presentation on the 8th, I think that we've delivered upon that. I also said at the time that one has to be careful about your question about fixed cost. It's very nice to say, well, shrink and then your margin will go up and your multiple go up. I mean, that's a very nice investment banker conversation, except for the fact the reality of it is, that there is a corporate fixed cost, and you need to be cognizant not to under-absorb there also, right? And so what I said in 2018, it was 2-pronged: A, we thought there was a lot of value to be created in the portfolio that we started with; and B, that we needed to rescale the size of the business that if we wanted to preserve optionality on the portfolio that we wouldn't run into that under-absorption problem, we're now larger today than we were in 2018. So at least that option is on the table. I'm not promising anything, but we've taken care of basically both those headwinds, meaning selling at the bottom and not preserving shareholder value, right? Because I think for the most part, we've expanded the margins and even some of the businesses that everybody was all worried about back then, and we've rescaled that were actually larger than we were when we had Apergy.

So I want to open up to the audience in a second. Let me ask you one other question, and then I'll do so. Like so I think in the last year, we've talked about maybe 2 out of your 17 businesses being sort of weaker. We already talked about U.S. dispensers, biopharma connectors is the other one, obviously, and some people asked me about Belvac. So maybe you could just sort of talk -- we already talked about in retail filing, we don't need to talk about that. Like do you think biopharma connectors have to turn the corner, you kind of suggested that last quarter with orders sequentially improving and then how are you feeling about Belvac?

Yes, I'm not worried about biopharma connectors. And I'm not going to apologize for taking the opportunity it was there. I mean we made a bloody fortune during COVID. And -- so this notion of over-earning and that's a bad thing, I find a curious discussion at the end of the day. But if we strip out all the COVID-related revenue, the core business is still growing in excess of 20%. So we'll take the cash when we can get it, and we continue to invest behind the business. And we think that -- so that's an area that we're very attracted to. And as I mentioned in the last call that order rates are starting to inflect. So I think that's a precursor of -- we're probably bottoming right now in terms of demand because the inventory -- the COVID inventory has worked its way through the system and then we'll slowly just kind of reflect the other way. Belvac, everybody is worried about Belvac. I'm sure everybody has been buying Dover stock because of what they thought that Belvac was going to do. Look, I'm not running from the fact that we do have some cyclical businesses, Belvac, again, had a really good run. We're really proud of the guys. They did a fantastic job. Am I -- I think in our forward year forecast from here, we don't have Belvac getting any larger. But I can tell you, if it was to get smaller, that is not a headwind that we can't deal with the balance of the portfolio again. So hopefully, we're not going to hang our hat on Belvac demand for the next 3 years. I think it's entirely manageable.

Thanks, Rich. Questions from the audience. Any questions? Questions? All right. Then I will keep going. Let me ask you about CapEx, Rich, actually. So as you noted, '22 was a record CapEx year. And so where are you now in terms of capacity? Do you have any more sort of bigger projects that you want to do? And how do you look at CapEx normalization?

Sitting here today, I would expect a lower in '23 than '22. We did -- and we're going to go through this on the 8th, but we made some significant investments in productivity over the last 18 months, particularly in our capital goods portion of the portfolio, right? So back to this notion of automation and labor as a percentage of COGS. We're cognizant of that. And so we were on the front foot investing in that even before labor costs became the headwind than it is. And that's a onetime investment, and we're done, right? So we expanded -- we shut down well largely curtailed production in China in a business for VSG that was back shipping into the U.S., we've basically taken care of that. We've invested in our Madison, Indiana plant. So reshored, if you will. And that's largely done, and we made meaningful investments in ESG largely around paint systems and kind of total productivity. On the other side, we invested meaningfully in businesses that we think have secular growth opportunities. So we expanded globally in production of brazed plate heat exchangers for heat pumps, which will take you through on the 8th. And we invested in -- what is our biopharma business, but really know what no one knows about it actually is a connector business at the end of the day that we're doing a lot of connectors for EV chargers and data centers and a variety of other things and we've built a new plant for that. So a little bit of split and that's onetime investments. We don't have to do that again for a period of time. Hopefully, CapEx will inflect up because CapEx inflects up, and we believe that we're investing behind strength and investing behind demand. Sitting here today, I would expect year-over-year for it to come down.

We have a question from the audience.

Looking out long term, 5 years, 7 years, how do you see your -- like what do you look like in terms of your portfolio and your general thoughts like longer term? I've seen your portfolio transform a fair bit since in the last 10 years. So in that same thought...

The way I would answer it is if you take a look at where we've been investing inorganically, I would expect that to continue. So if you look at the segments that we've been spending the money, and what we've been investing behind. I mean -- you didn't ask the mega trends is a new thing...

I will ask...

I know. I know. I know. That's the new thing to talk about mega trend. When we renamed the segments, we were trying to signal what we are investing behind. So when we changed fueling into clean energy, that was part and parcel to us doubling down into the investments that we made into hydrogen components and gas components and the like. And when we then -- when we renamed refrigeration into climate and sustainability, that was a precursor of this is what we think we're investing behind, and we've invested quite heavily behind heat exchangers and CO2 systems, basically, what we believe transforming both of those segments, which are meaningful segments of the company into what we think are longer-term systematic growth areas there. So where we're deploying the -- at least the inorganic portion of the capital, the lion's share of the inorganic portion of the capital, I think that you would expect that those segments would be progressively getting larger over the next 3 years to 5 years.

So I have to ask this question. I got 20 seconds so you can get very correct answer. So what are the top 2 or 3 innovations mega trends or structural changes affecting your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked?

I think I just answered the question at the end of the day, right? I mean we don't do things just to do things or we're -- clearly, we're not marketers at the present time, as unknown as the wet blanket in terms of a variety of different things. But I think that we put our money where our mouth is, and the reason that we changed the name of those segments is we believe that those 2 particular areas have significant growth potential. And we have either the market presence of the IP that we can extract significant value creation out of it.

Awesome, Rich, thank you for your time. Appreciate it.

Right. Thanks, Andy.

You're welcome.