Dover Corporation (DOV) Earnings Call Transcript & Summary

Okay. Good morning, everybody, and welcome to Dover's 2023 Investor Meeting. We will begin the meeting with a presentation by Rich Tobin, Dover's President and CEO, and we will then open the meeting for questions. Together with me and with Rich is also Brad Cerepak, our Chief Financial Officer. This webcast will be available for replay on Dover's website. Dover provides non-GAAP information and reconciliations between GAAP, and adjusted measures are included in an appendix to the presentation material. Our comments today may contain forward-looking statements. We caution everyone to be guided in their analysis by referring to our Form 10-K 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. And with that, I would like to turn it over to Rich.

All right. Thanks, Andrey. Before we get going, let me give you an update on where we are on the quarter, so we can focus the Q&A on the strategic portions of this presentation, rather than what's going on in Q1. Q1 is progressing just as we outlined it in January when we gave our full year guidance. So we'll reaffirm that guidance today. But overall, we're tracking very much -- as we told you, it was going to track in terms of the seasonality of the orders and everything else. So we feel pretty good, despite all the noise around Fed funds rate yesterday. Thank God, we're doing this today and not yesterday. That would have been a little bit of a bummer. But right now, nothing is cracked, and order patterns and demand patterns are like we thought they were going to be. All right. So let's get on with the presentation. You can see on the slide, we've got some objectives for today, but I think let's take a moment to step back, and this is the third -- this is in a trilogy. It's the third of the presentations that we've done. We did one in 2018. We did one in 2019. In '18, I would describe that as new CEO what are we going to do in terms of cost takeout as a result of the spin of the oil and gas assets. We said that we'd go into a little bit of a quiet period in terms of M&A, and that we'd come back in 12 months and kind of set some goals and do a variety of things. We came back in 2019, where we showed the new organization. We went from 3 segments to 5 segments with the intention of giving more granularity in terms of the portfolio. And at the time, we set some pretty ambitious objectives. And at the time, I think it's fair to say that we're asking you for some belief in the underwriting of those objectives because you had to just believe us that we thought that we had opportunity in the portfolio that we could extract. And other than brute force and taking our word for it, you had to take our word for it at the time. I think what you're going to find today is that this presentation is a little bit different. We're going to give you another set of ambitious objectives from both a revenue and a margin and a shareholder return objective. But this time, rather than kind of underwriting a belief, I think that what you're going to find is that we've built an engine now that track record and an engine to go with it that makes the story, hopefully, a lot more understandable and to provide a more concrete -- some concrete examples of how we're going to get there. So that's where we are today. So you can see the 6 objectives of the agenda. It's to highlight the evolution and upgrading of the Dover's portfolio, provide a scorecard of delivering on commitments outlined in 2019, elucidate Dover's attractive growth profile, outline margin expansion potential. We're going to spotlight some select businesses that we don't think they're well understood and the value creation initiatives in those businesses. And then we're going to discuss our track record in terms of value-enhancing capital allocation. So all the tools in the toolbox will go through them. So let's start here with Dover today. Here's the fundamental elements of the portfolio. And over the next several slides, we'll cover specific attributes of the segments further in the presentation. Dover's business model is a simple one. We identify business positions with structural profitable opportunities that are defensible in nature due to concentrated market structures and have regulatory or specked-in barriers or both. Using the scale benefits of the total portfolio, we're able to deploy organic and inorganic capital and extract operational synergies at the individual companies. And more importantly, the competitors cannot execute with the same efficiency. So let's start taking a look at the consolidated portfolio and how it's changed since the last portfolio update. The portfolio has evolved significantly since the last Investor Day. Consistent with the capital allocation priorities, we've been deploying consistent organic and inorganic capital to areas that we believe exhibit the characteristics of a Dover business and have continually invested in our center-led capabilities that drive our ability to create value across the portfolio, which I'll cover in detail in the presentation. The Dover portfolio today is larger than it was pre-Apergy spin. As we discussed at the time of the spin, we are going to be concentrating our efforts on improving the profitability of the core portfolio, pruning the portfolio and adding to areas of strength and rescaling the enterprise to provide for future portfolio optionality. And I think it's clear that we've done all 3. There are 2 common characteristics of the businesses that we find attractive, and that we have a proven business model to operate, high-value specialized equipment businesses where switching costs are high, and that drives significant streams of aftermarket service and consumable parts from the installed base; and specified critical components that have significant intellectual property or regulatory barriers to entry, which are often manufactured at scale, lessening the risk of customer vertical integration. Along with expanding exposures to growing end-markets, we purposely drive growth of these 2 attractive business models. Thanks to that, the Dover portfolio today looks markedly different in 2023. I've covered this in the previous slides, but I call your attention to more specific definition of attractive characteristics of the Dover business, for example. The end markets are small and medium-sized TAMs that serve of larger end markets with highly engineered specialty products, competitive positions in market structures where competitors are often small- to medium-sized private companies. This is where we believe that our scale and operating model provide defensible competitive advantage. The business model of installed base driving aftermarket consumables is not new, but we are injecting a healthy dose of digital capabilities into that business model to make it even more attractive. Our digitization efforts include connecting products to generate valuable data to new -- and new value to customers, while providing critical information to us for service and parts revenue streams. We'll give you some specific business examples further on the presentation. We invest in digital tools and improve the customer experience and drive internal commercial excellence which improves conversion, stickiness, pricing discipline and SKU management. Our goal is to manage these tasks centrally by operating company, mopping up the significant leakage in a distributed model. And lastly, we leverage digital to sell integrated value propositions, which I'll cover further on in the presentation. This is a critical component to our success over the next forecast cycle. Wrapping up, before we do some deep dives here, our formula is relatively simple. Take strong niche businesses in attractive markets, giving them driven and properly motivated teams to run, add world-class capabilities to these businesses, which would not be able to afford or develop on their own to drive performance and synergy, and to allocate capital responsibly and smartly to these areas of highest growth and opportunity. The last toward Dover's reason to exist, provide capabilities and resources of a global manufacturer to high-quality niche industrial franchises and to allocate capital to best use in a diverse portfolio, we strongly believe this is a source of tangible competitive advantage for Dover to drive significant returns. And before we move on to the next section, we are a performance-driven organization, and it applies to everything that we do, including our commitments to ESG, which we treat the same as all our other internal and external objectives. We have made significant progress in reaching our objectives, and that progress has been recognized by the certification bodies. I would encourage you to visit our sustainability website for a fulsome review of the objectives and progress. We are very proud of the results. I think that what you're going to find is then rather than punting our goals to when a period when I'm long gone, which requires a belief in the introduction of technology and capacity that doesn't exist, we've taken a measured approach where we do 3-year goals that we hit and then we exceed on a 3-year goal on a rolling basis. I think that, that model has been well received by the rating agencies who would like to see tangible goals rather than net neutrality in 2035, which seems to be the norm. I can just tell you anecdotally that Scope 1, we are very confident in. Scope 3, we're very confident in. Scope 2 requires a build-out of low-carbon energy infrastructure, and we'll see how that develops and whether that -- from a cost point of view, whether that trade-off is acceptable or not. But on 1 and 3, we're in real good shape. The targets and the results speak for themselves. Importantly, we've used all the tools we've had to deliver a comprehensive effort across all of our organizations. So this is basically -- you can read the slide. It speaks for itself. You also see this slide because we introduced it in 2019, and we have continually updated over the past 16 quarters. And we benchmark each of our businesses versus relevant peers and competitors. But at the portfolio level, we benchmark ourselves versus other world-class multi-industrials with whom we compete for equity capital. Performance of the last 5-year cycle compares very well. Importantly, we have outgrown our peers, despite the considerable handwringing about individual pieces of the portfolio over the last cycle and delivered better-than-average margin improvement with little portfolio change. The portfolio is also resilient. We had quite the test back in 2020. Our portfolio also performed commendably in 2020, where we declined less than average and better protected margins. Our business model of smaller scale and low fixed costs is able to move with speed to adapt to changes in market conditions, both positive and negative. And I think you see the example of kind of both of that here. I think what you need to understand is while I guess the 3 of us here are obligated to do the benchmarking against our peer group, the way that we run the business is not this way, right? We benchmark our performance at the segment and actually at the operating company level against the peer groups in terms of the marketplace. The consolidated performance is what it is, but it's not -- we don't spend a lot of time showing charts to each other about our relative performance versus our competitors. This is the last one, and strong portfolio plus strong execution equals superior value creation. As I mentioned, we use all the tools available to us to create value for our shareholders, but we are particularly proud of the net earnings growth performance, as you can see on the right. As we have discussed in the past, we believe our multiple discount is largely driven by the mistaken belief that our portfolio undergrows our multi-industrial peers, as we have shown. That has not been the case. So let's move on to underpinning the future growth potential from here. Growth is a key driver of long-term value, as you all know. And in this section, we'll shine light on our attractive growth profile. On the left, long-term actual segment growth, look at the period now, this is 2010 to 2022, so this is not picking and choosing over a short cycle here, with average Dover CAGR of over 4%. These organic rates are sustainable to the future with a step-up of expect -- step-up expected in several segments, especially in Pumps & Process, Clean Energy and Climate & Sustainability on well-understood drivers that we will cover more in detail. You can have an Investor Day without the -- employing the newest buzzword. So here we are with megatrends. Why we insist on labeling these things is beyond me, but nevertheless, we have a portfolio that has been successfully participating in many areas of secular growth driven by a multitude of underlying drivers. We don't apologize for not having a single thematic. Frankly, we would argue that having tentacles in a variety of growth themes is a stronger position to be in from a portfolio perspective. We'll address some of these more interesting ones in the segment discussion. We have deployed a business model and tools to enable sustainable long-term growth. We invest materially in R&D, and our management team is compensated on IP development and product portfolio revitalization goals. We deploy inorganic capital to early-stage products and IP to augment our organic efforts, and we deploy inorganic capital with proven value creation algorithm. We invest meaningfully behind productivity, capacity and top line enablement e-commerce platforms, which we'll discuss in detail from here. We've been active in M&A after our quiet period, if you will, between '18 and '19. Remember the big speech about the right to act inorganically. I think that we stuck to our guns there. We would have liked to have been more active, but as we all know, valuations because of where the markets were got kind of sticky. And then we lost a year in 2020 mostly just because of the pandemic when virtually hardly anything traded. But despite those headwinds, active M&A has been Dover's DNA for 65 years and remains integral to our continued portfolio upgrading. As you can see, we're executing in line with the priorities that we've outlined in 2019. The key themes in our M&A have been acquiring attractive growth exposures, enhancing our digital offerings and share of high-margin components businesses. Our inorganic priorities remain unchanged, and we are actively working an extensive pipeline. So we believe that we have continued -- we believe that continued 4% to 6% growth trajectory is sustainable, credible and achievable. There is nothing in our track record that says otherwise, and I hope we dispelled the issue of fixating on individual businesses that have disproportionate negative impact that may have a disproportionate negative impact on the total portfolio. After all the discussion about EMV and refrigeration and a variety of other things, the strength of the total portfolio, coupled with organic CapEx and inorganic activity, allows us to deal with whatever headwinds that we may run into. We're not sitting up here and saying that these businesses are going to statically grow year-over-year. That's just not reality, right? Demand changes from time to time over geographies and across a very wide portfolio, but is there anything in the portfolio that's so material to the earnings profile of Dover that it wags the dog, we would argue not, and I think that our performance shows that. We've deployed significant capital organically and inorganically behind areas of secular growth over the last cycle. We have clearly demonstrated that GDP portion of our portfolio is a conservative estimate, and we have ample avenues within that portfolio to exploit. So now let's move on to the margin section of the presentation. Similar to growth, we are proud of our margin performance and confident about the opportunity ahead. Improves -- we improved segment margin by 370 basis points since 2018, and we continue delivering 25% to 35% incremental margins that we are currently targeting -- and we are currently targeting the upper end of the range. All key levers still have gas in the tank. As you saw, we have favorable mix baked in, and our portfolio management generally results in better margins through addition and subtraction. Our enterprise capabilities have been a strong contributor, and we are roughly at 50% adoption opportunity capture, which I'll go through in some detail. And our operating teams are continually challenged to drive productivity on the ground through automation, SKU simplification and footprint consolidation. Remember, on the footprint side, arguably, we lost 2 years over the last cycle. We lost the entire COVID year because we couldn't deploy anybody out to do it. And then when we had the significant growth -- or the re-acceleration out of COVID, we needed all the capacity that we had. So we never really did anything meaningful in footprint until the second half of this past year. We have an active pipeline, and we would expect to be more active over the next cycle than we were on the previous cycle in terms of footprint consolidation. The building blocks of the target margin improvement around Slide 25. Mix and productivity contribute about half in enterprise capabilities, another half of the margin growth. We continually reinvest in R&D, commercial initiatives and build our enterprise capabilities, which consumes some immediate margin, but provides future growth. As with our growth algorithm, our margin improvement plan is not a one-trick pony, but rather a set of specific credible levers that we have been successfully employing and will continue to do so. When I -- with the opening comments, I said that at the time that we laid out the objectives, there was kind of a belief, right? And if you remember at the time, we said Dover's job at the center was to extract synergy value out of the portfolio, and we've introduced kind of the 4 pillars of what is being led from the center to extract those synergies. So let's go take a look at all 4 because I think that you're going to be, and surprised maybe not the right word, I think that the amount of scale that we've added here is significant. And the amount of capability is significant from the starting point in 2019. So let's take a look at all 4 of them. Dover Digital has been a very important initiative and arguably our most important one through this forecast period. Centralizing certain IT functions drove tens of millions of dollars of savings, strong focus on digital commerce and customer experience to drive better commercial outcomes like revenue per FTE, lead generation and conversion. Longer term, we expect this to drive significant efficiency and cost to generate and support sales as well as the benefits of pricing discipline and SKU management. Digital channel sales went from sub-$100 million in 2018 to $2 billion in 2022. Digital helps our opcos deploy market-facing connected products, IoT and software solutions, which we'll show you in a moment, and world-class capabilities that opcos on their own would not be able to afford, and it is a competitive advantage to their competitive base. So think about world-class spending spread across a wide portfolio who, in fact, competes with medium-sized companies. You can read the stats, but I think they're relatively impressive. I can actually spend all day on this slide. The performance has been excellent. Recall, our goal is twofold: to consolidate our noncustomer-facing transaction activities to centralize processing centers where they can be executed at scale. We have significantly widened our product offering to include a variety of services from the well-understood APR activities to include expense report management, real estate management, et cetera. As mentioned, our current scope, we are approximately 50% penetrated across the portfolio. Secondly, and arguably more importantly, our goal is to free our business management teams from being administrators to actively driving results. 100% of the time should be spent concentrated on customers, our product development teams and driving operational efficiency, along with hunting for M&A. We believe this is a significant market advantage. An additional tool provided to our business leaders is our innovation center in India that allows us to do around the clock co-engineering, CAD drawings at scale, patent management and fulfillment, testing labs at scale. The growth of the headcount, you can see at the top left speaks for itself. And finally, what we established in 2019 is operational excellence and automation teams, a centralized team of skilled operations experts test with helping our businesses systematically to deploy lean; to seek and execute advanced manufacturing, automation and productivity initiatives; to manage large CapEx projects you're sitting in one, right now, like the automation of our Richmond facility; and to drive global supply chain efficiency, sites where we've deployed 0DOVER operational excellence programs have seen notable outperformance across multiple metrics. So think about smaller companies, again, taking on relatively complex, either significant capacity expansions like this building that we're sitting in or sophisticated automation projects, they're not going to have that expertise nor could they afford to have that expertise at the operating company level. So basically, we have a central team that deploys to do it with them in conjunction with them. And we've seen some pretty good success there. So when e-commerce and operational excellence and centralized engineering services combine their efforts, digital commerce data allows for data-driven SKU management. We deploy 80/20 tools to identify opportunities to decomplexify our product lines, and then we reengineer the platforms for design for manufacturing. So here's 3 examples of those different pillars working together. In Food Retail, Dover case has essentially gone from a custom job shop to less than 100 standard models. Harmonization of platforms in aboveground dispensers will reduce European SKUs by half. And VSG, or Vehicle Service Group, has eliminated several regional brands and reducing nearly half of its total automotive lift SKUs. Complexity reduction opens the door for automation and footprint consolidation. So there's a little bit of a method. The madness here, it's not -- we're not asking for belief, right? We have all the tools, and we've invested in the tools at scale for the next cycle for us to drive it with more velocity across the portfolio because through the '18, '19, '20, I mean, we're just standing all this stuff up, right? We are actually not net neutral from a cost point of view, right? You have to build these things, and you get them to scale, then they leverage themselves. So we think about back office processing. In the early years, we're just adding so much scale to those business activities, we weren't actually getting any savings on a per transaction basis. Well, now, we're fully absorbing. Now we can see on a transaction basis as if we're an outsource you what you would demand, we see some significant operating leverage there, right? And that's -- so it goes from being a little bit of a headwind from a cost point of view to a significant tailwind over the next cycle. Here's no doubt, everybody's favorite slide going to be when we get to the end of the presentation. Here's the objectives. We did it back in '19. So here we are again. I think it's exit '25. They're all doable. Arguably, when we go through the segment discussion, Clean Energy & Climate look conservative if cryogenic and CO2 ramp, but let's go through segment by segment. We can't go through every operating company, so we're just going to highlight some of the kind of growthier things that we're working on. But we think that all of these are achievable. I'm sure we'll have a little bit of accordion effect because markets all don't expand at the same time as we discussed before. But on the run margin performance, these are all achievable and accretive. Okay. Let's move on to the businesses. You've seen these slides before, and I'm not going to go through any one of these slides. These are for your purposes just so you can compare them to the ones that we used back in '19, okay? So I'm going to kind of go briefly through the segment overview slides and then go and do a little bit of deep diver. So this is a collection of niche-leading businesses with GDP growth profile and margins often exceeding their peers and competitors. Look, waste, I think that our customers do a much better job of explaining why this is a growth industry than I'm ever going to do sitting here. But the fact of the matter is just in terms of GDP growth, number one, and a growing waste per capita, increasing complexity for collections and then recycling. These are well covered. I know what I want to do is highlight, be able to drive the value in this market well above the general market growth rate and how we do that is this. This business has looked like a body builder and understandably so, right? Its core business was body building. But we want to highlight the impressive transformation of this business. I doubt anyone outside Dover appreciates what the business has accomplished and the quality of this franchise. Methodic, organic and inorganic investments starting in 2019 -- 2016 transformed the business from a refuse truck body supplier into an integrated supplier of equipment, aftermarket parts and digital solutions, including a sizable and growing [ SaaS ] software business. With semiconductor shortages still constraining chassis availability and equipment volumes, which have not recovered to pre-pandemic levels, double-digit growth in parts and digital drove the growth in profit of this business over the last cycle. Parts and digital drove the majority of profit in 2022. That's not necessarily a run rate profit mix because truck margins were still impacted in '22, and these will remain powerful and growing sources of earnings in this business. The value that we're delivering to our customer is significant. Our Connected Collections digital offering started with 3rd Eye camera-based safety solutions. Over time, we have built out a comprehensive suite of vehicle-based digital offerings, including tracking and routing, vehicle health assessment and contamination detection. With the acquisition of Soft-Pak, ERP software connected the truck to back office enabling enhanced functions like automated billing for overflowing or missing containers. These digital solutions are important drivers of commercial and operational efficiency as well as safety. Let's move on to VSG. We're a market leader with longstanding position, large installed base and a global presence, tailwinds driving sustained growth. Aging car park, 17 million vehicles are now entering the repair sweet spot over the next 6-plus years; growing sophistication of vehicles through ADAS and connected vehicles; electric vehicles requiring more frequent tire changes due to their weight and specialized lifts, so all the lifts have to be converted to accommodate EVs; and consolidated large dealer networks moving to hub-and-spoke service model, driving significant CapEx expansions in the larger dealer networks. Organic and inorganic investments, our digital team helped develop a new ADAS calibration offering launched recently in collaboration with TEXA diagnostic tool supplier. We acquired some laser-based technology that automates hail damage assessment, and significant productivity investments in plant redesigns and automation lowering labor as a percent of COGS, and facilitating footprint consolidation going forward. Clean Energy & Fueling the -- here we go with the EMV story that just never really manifested itself. We have a collection of leading providers of solution for retail fuel and car wash, critical fluid transport and clean energy components. We grew the margin over 450 basis points since 2018 and positive mix cost reductions and operation execution. First, we want to highlight the diverse sources of revenue and evolution since 2018. We made a deliberate shift away from fueling capital equipment to our other growth areas. In 2018, dispensers were roughly 35% of the segment. We are now closer to 25%. We have focused on growing in aftermarket and digital businesses, less levered to CapEx. And clean energy and vehicle wash remain priorities in inorganic growth capital. We got a positive mix story here, expect mid-single-digit to high single-digit long-term growth driven by areas we are investing inorganically, and our fastest-growing businesses also generally our highest margin. Two stories. I know that one part of the story, we like to talk about quite a bit, but there's two stories here. The two stories simultaneously happening in this segment, margin improvement and diversification and growth. On the margin side, retail fueling businesses began with OPW. It's been around forever. We added above ground portion in 2016. For the first 5 years, we focused on early integration and synergies like footprint consolidation and delivering on the North American EMV wave. That drove commendable margin expansion, and now we're entering Phase 2 of a synergy extraction for our global product platform harmonizations, tighter integration between the above ground and the below ground. So we basically combine the management that's run as one business now, rather than 2 separate businesses, and growth investing behind areas of growth in car wash and clean energy; future margin improvement through time on mix; structural cost reductions; and improved productivity. So think about running one portion of the portfolio in a hyperefficient manner, which generates the cash that is redeployed into the areas of growth, which are margin mix positive. It's what we've been doing, and we're going to do it again over the next 5 years. So we can expect, as I mentioned before, the margins that we laid out for '25, we see a clear pathway to exceed them. It's just purely a question of whether we've got the market demand timing correct or not. We've done a dedicated Investor Day in the fueling business not too long ago, and our view hasn't changed. We like the space. It's highly regulated, a lot of safety and compliance driven, technology stable and attractive market structure. We expect growth in excess of GDP in core retail fueling market for the next decade, and there are well understood drivers of that. I don't want to highlight the value creation opportunities. I do want the Anthem user interface as a success story, with a big runway. That's a unique and most advanced solution platform in the market with a large touchscreen, and sophisticated software enable rich media environment and customized experience. It's over delivering on its growth expectations. Proven customer return on investment in terms of sales lift, it enables an app store like business model where we can monetize the value and return on investment enabled by our technology, and it links into car wash. So you think about -- well, I think we move to this slide, maybe give you a different picture of it. Who's going to control kind of the interface when a customer pulls up, whether it's an EV charger or a fuel dispenser or whatever it is, right? There's a big discussion, whether it's the back office system or the point-of-sale system. Or is it at the dispenser? Is it the kiosk? We believe we're going to be able to arbitrage profits from the point of sale that is at the dispenser, and we believe that we've gained on the march in terms of having product available. The purchase price of one of these is significantly higher than a traditional expense. So from a revenue point of view, you don't have to underwrite a significant amount of volume to protect revenue. So this will develop over time, but we think by our leading position in underground, our co-leadership position on aboveground and our leadership position in car wash, we've got the right to be the integrator from a retail point of view. I'm not going to read this slide, but I'll call your attention to Section 3. Clearly, our customers agree that this is an area of significant potential and are backing it up with significant capital deployment. We're really excited about the industrial and cryogenic gas space as decarbonization growth story on top of a solid trajectory in the base industrial gases. So in the grand scheme of things, who's picking a winner in terms of the energy complex? We're tripling our bet on the gas complex. We've invested $950 million in 2021 in LIQAL, Acme and RegO, platforms that are margin accretive. We have a diverse platform with strong momentum. We're supplying a variety of safety-critical components like valves, regulators, nozzles, dispensers and ultra-cold, ultra-high-pressure cryogenic gases. We're targeting a variety of applications across the whole cryogenic value chain from production to consumption. We are agnostic to the gas or liquid form, multiple molecules handled, included LNG, hydrogen, propane, oxygen and nitrogen, et cetera, and we're benefiting from strong investment momentum by industrial gas majors and global government infrastructure spending. Our business has occupied a sweet spot of Dover business model, a highly fragmented supplier base, engineered often specified critical components with ample opportunity to apply Dover's e-commerce and operations playbook. We were an early mover in car wash. We were able to acquire Belanger and ICS at very good multiples from where they went over the next 3 years, quite frankly. We're building a comprehensive offering for both independent and large retail customers. We expect further consolidation in the market with clear winners. And the growth rate and margin mix of the carwash business is both of them are accretive to the segment. So we think that we're going to be a winner here. Let's move on to Imaging & ID. The segment consists of core marketing and coding equipment and consumables and associated traceability and connected product software as well as textile printing equipment and consumables. Significant reoccurring revenue base of consumables parts, professional services and attractive growth in software. Textile printing is 10% of the segment and continues its slow post-COVID recovery. Core coding -- core marking and coding market is very steady and consolidated. Growth from increased penetration of variable product ID requirements driven by regulations and transition to more sophisticated data-rich format. So think about barcode to 2D code. We've added growth in the sector from vector in software and digital capabilities, increasing demand for traceability in pharmaceutical and high-value consumer goods and food safety. Digital technologies enabling product authentication, and consumer engagement and digitization of the factory floor and remote monitoring. Our organic and inorganic investment in recent years have driven software growth from 1% in 2018 to 8% in 2022. Recent acquisitions of Systech and Blue Bite have allowed us to move out of our core position on the packaging line into supply chain traceability, there's that word again, and consumer engagement. Increasingly engaging with brand owners and marketeers, just not packaging operations, secular growth there, and we see more opportunities to add to the platform and expect robust organic growth. We're on the floor here. So if you think about a variety of different track and trace or inspection technology, we've got the right -- we're down there. Our customer knows us. So I think we have ample opportunity from an inorganic point of view to widen our participation in this particular sector. Moving on to Pumps & Process Solutions. This segment gets a lot of attention and rightly so. It's a best-in-class collection of flow control and critical processing assets. Expect highest growth -- highest long-term growth and highest margin performance in DPPS, so -- what you saw from the slide. Highly challenging and offering highly regulated markets, with high customer to supplier ratios, brand equity. Products chosen by quality performance and less sensitive to price. Large installed bases with strong replacement demand. Brand equity and often specced in, in terms of the products themselves. So everything that we talked about, about what we consider an attractive Dover business. These are them. Let's do a little bit of a deeper dive. I'm not going to spend a lot of time on bioproduction because we're sitting in CPC, and I'll make a fool of myself versus what Janel and her management team can tell you, but I'll try to hit the highlights here. Two of our businesses, CPC and PSG, provide single-use components used in biological drug manufacturing. Biopharma production is growing at 10%, about double the rate of traditional pharma. Within biopharma, secular shift away from stainless steel, vat and tube welding to single-use components for the reasons that Janel and her team will likely take you through. Market for our products is growing well into the double digits. And underlying biopharma market poised for secular growth on strong R&D and trials pipeline, growth in cell and gene therapies and biosimilars. Biopharma and our medical platform was $200 million in 2020. It doubled to roughly $400 million in 2022, despite deflation from record driven COVID volumes in 2021. It's purpose built. We entered the biopharma organically in 2009. We acquired Quattroflow in 2012, Em-tec in 2020, Quantex in 2021 and Malema flow meters in 2022. We have also significantly added to capacity, expanded Quattroflow capacity in Europe in 2018, added this greenfield facility in 2020, so -- and added additional capacity in biopharma in '21 and '22, and basically splitting biopharma away from balance of the connector business, which Janel will take you through. Below, we show upstream and downstream skids. Strategy is self-evident to acquire critical components that are specked in and low on biller materials. We continue to invest meaningfully in this platform, despite the post-COVID headwinds, which our business leaders will address in the main presentation. Another area of growth of the connector business was the shift from air cooling to water cooling and high-performance computing data center and EV charging. We expanded capacity at the CPC facility in '22. We just got done, as a matter of fact, to meet demand. And we're collaborating with chip designers to get specked in on end applications, where they'll take you through when you go through the tour today. Result is that we think that we have a winner here. Thermo connector is following the same growth trajectory that biopharma did 6 years prior. We'll further address this again when you guys take the tour. Plastics and polymer processing equipment is another success story and a purpose-built market-leading platform. Underlying demand for virgin plastics continues to grow above GDP, with global investments in recycling driving additional upside. We've got particular strength in Asia, as China, India strategically invest in domestic production. Process equipment industry is well-structured, longer-cycle nature with strong aftermarket parts attachment. We spent $600 million in -- across 8 acquisitions dating back to the acquisition of Maag in 2012. Including the recent acquisition in Witte in December, we believe -- which we believe will be highly synergistic, we expect this platform to generate in excess of $100 million of EBITDA this year and growing. This highlights the value creation power of these niche markets where smart expansion strategy is deployed. Moving on to Precision Components. It's a collection of highly engineered bearing seals, compressions -- compression components for rotating machinery and harsh and critical applications, traditional businesses benefiting from the revitalization of U.S. energy infrastructure, including midstream pipelines and gas compression. We are also starting to see nascent growth in demand for energy transition applications. Their existing pipeline compression infrastructure will need to be retrofitted to support hydrogen as a fuel. And as such, we've invested in a hydrogen testing facility. I think one of a handful worldwide, in partnership collaboration with key OEMs, we've also developed fluid film bearings for offshore wind to transition away from less efficient and higher maintenance roller bearings. We struggle a lot when we were putting this presentation together about how much detail that we put in it because there's a competitive aspect to it. I would tell you that from an R&D perspective, the success here of what's in the pipeline is extraordinarily interesting if we get it right. Okay. We changed the name from Refrigeration & Food Equipment to Climate & Sustainability Technology to underscore the core drivers, and I think we got a little bit of stick about that at the time, but I think that we were right. We divested our Food Equipment business in 2021. Majority of the recent and forecasted growth is tied to sustainability trends in heat pumps, aluminum cans and natural refrigerant systems. Recently, the segment has been a material driver of Dover's EPS accretion through strong organic growth and significant margin improvement runway. So let's think back to the days of get rid of this business because it's a drag on margins and everything else, not so fast. So a similar layout to the Clean Energy segment with similar messaging. We've invested behind the fastest-growing parts of the segment, which were also the highest margin. We've strategically exited several branches of service business due to the commoditized nature of that product offering. We're deploying 80/20 to only selectively grow refrigerated cases and are running for margin maximization. We're investing behind margin accretive CO2 systems in Europe and the U.S., with a strong patent portfolio and expanded capacity. CO2 systems make up -- made up nearly 30% of Food Retail profit in '22, up from 14% in 2018. Sustainability goals are driving a shift away from hydrofluorocarbon refrigerants towards natural refrigerant systems, which typically run on CO2 in the supermarket segment. We are the #2 provider of natural refrigerant systems in Europe through Advansor, which we acquired in 2012. We brought that technology to the U.S., where we're the clear market leader with a patented technology portfolio. Europe is 5 years ahead of the U.S. California and Washington were the first movers on regulations in the U.S. EPA is moving towards a countrywide transition by 2025. I think we have multiple years of continued double-digit growth in this product line. Decarbonization regulations in Europe are driving a secular shift away from gas boilers towards heat pumps. Brazed plate heat exchanges is a technology of choice for hydronic heat pumps due to superior efficiency, low maintenance needs and the small footprint. Intellectual property around material and fluid dynamic science and production know-how sets a very high bar competitively. We have teams of PhDs continued -- on continuous product enhancements. And as a result, a consolidated supply base is running now at max capacity. So there's a deficit between demand and supply. We are adding $70 million or a 50% increase in capacity to ensure supply and that we can win going forward. Okay. Let's try to land this plane. We've shown this slide -- I think this one goes back to 2019. Capital allocation priorities remain unchanged. First, we invest organically behind high confidence, high ROI projects, capacity expansions and high-growth businesses and productivity and automation and capital goods portion. Next is inorganic bolt-on acquisitions in core markets. Priorities remain the same as earlier in the presentation, high-growth markets, leading positions and return on invested capital above our hurdle rates within 3 to 5 years. Finally, we won't sit on cash. We've raised our dividend for 67 straight years. And strategic share repurchase, such as the $585 million we did in '22 opportunistically. We're an asset-light business model. Acquisitions and buybacks may shift year-to-year, but over the last 5 years, have been relatively similar, so an accordion nature. We have ample capacity for additional firepower over the next several years, which you can see on the right of the slide. And we balanced capital allocations in line with the average of our multi-industrial peers. Organic reinvestment has grown in line with our revenue growth. We're not becoming more capital intensive. '22 is a record CapEx year. We already told you that we expect '23 to be down on '22 just because we don't have as many greenfield build-outs, and that's despite the fact that we're investing heavily in SWEP on the heat exchangers and the in refrigeration on a brand-new plant for CO2 systems. And you can see the correlation on the right. Reinvestment is skewed towards highest value-creating businesses. This is not a capital allocation democracy here where we -- everybody gets a little bit of capital. You've got to make a compelling reason for us to deploy capital. And if we make a belief -- if you can make a compelling business case for it, then we deploy capital behind it. We got a good mix between productivity and automation investments versus growth and capacity expansion. We expect manufacturing square footage to remain neutral going forward. We'll consolidate as much as we had, and that goes back to what I said before about kind of the missed opportunity that we had during the pandemic about footprint, right? So we get now to more of a balanced outlook where we're net neutral in terms of capacity expansion than the retiring of capacity expansion through productivity and footprint consolidation. Here's a cumulative look at our compounding value creation of our recent M&A. Recent deals are growing at double digits organically at a margin that's accretive to Dover consolidated. Included in the aggregates are a number of strategic bets or option values that are currently small and dilutive but prove -- that may prove to be big winners if we are right on the technology adoption. Value creation from these strategic technology bets can be material. Quattroflow revenue has grown 25x, surmise its value has grown by more than that given the multiples prevalent in the biopharma space. Advansor has grown 7x. It is now north of $100 million in revenue, growing in double digits. We are excited about the high potential of some recent acquisitions, Boivin leveraging first-mover fully electric, which is RCV, which is an electric truck body for ESG. We think that we've got a winner there, despite the economics relying on the taxpayer. Malema with its first in kind single-use flow meter, which is dilutive to the segment right now, but we believe, from a technology point of view, provides some significant advantage. I think Karl will cover that with you on the plant tour today. And Quantex with a large-scale rollout underway for single-use hygienic pumps. So if you think about our M&A strategy, when we announced some of these smaller ones from time to time, where the multiple may look quite high, we try to do 2 things. We try to buy companies that fit the attractive business model where we deploy basically the 4 pillars, where we can extract significant synergy valuation out of maybe mature businesses. I think if you take a look at RegO, we did that. And we also take strategic high-value bets. We're not betting the balance sheet on these, but the optionality for significant value creation is high. You have to put risk capital to work. We just can't go around mopping up smaller growth businesses and driving synergy. We love that business model. But on the other hand, we need to have some risk capital at work. And to our successful business leaders, like the 2 sitting back in the room, we've been doing it. They better deliver, but that's something entirely different. We'll deal with that internally. So let's bring it all together. We're poised for -- to grow 4% to 6% through cycle. We have a credible margin runway at 25% to 35% conversion, yielding larger than 10% earnings growth, high plus -- 13% plus free cash flow revenue with expanding with margins. We're redeploying capital bias towards quality. Bolt-on M&A. We'll return capital to shareholders to generate top quartile TSR through this next cycle. And we see a clear path for continued double-digit EPS growth. It doesn't take a huge leap of faith for us to continue our organic growth and execution strategy or trajectory. And our strong cash flow generation provides opportunity to add earnings from M&A or capital return. And with that, let's go to Q&A.

Thank you, Rich. [Operator Instructions]. Go ahead, Julian.

Thanks very much for that concise run through. Maybe just a quick question on the operating leverage assumptions. I think, Rich, you talked about the higher end, the sort of mid-30s being targeted. And maybe the segment goals at, I think, DCEF and DCST could be conservative. So maybe flesh out the optimism on those 2? And also you've alluded a couple of times in different ways to more aggressive sort of footprint consolidation. Maybe just any background around the thought process there. Is it kind of a catch-up from COVID? And supply chain kind of hiatus or something more aggressive going on, on consolidating to larger plants, just the thoughts on that.

Yes, I got it. Well, look, I think that when you have the time to go back and look at the slides, we tried to elucidate. It was that the portions that we're growing is where we're investing behind. So let's take a couple of the examples. Brazed plate heat exchanges are accretive to climate and sustainability margins, right, and we're investing heavily. So if we're investing heavily, we expect that to be a growth platform. CO2 systems, again, is accretive to current margins of the segment. Again, we're investing heavily. To us, we think we've got a winner. It's just purely a question of the velocity of the adoption. Clean Energy & Fueling is a little bit of a different story. It's the velocity of the market growth on the gas side of the business. We can see the CapEx that's being deployed there. It's purely a question of what the lag effect is between capital deployment and actual purchasing of the components required to do it. So it could accelerate. And based on what we can see from our customers in terms of announced CapEx, it should accelerate. So -- and again, those particular pieces of the portfolio are accretive to margins. So any growth that we get there should be at the upper end of the range on the conversion side. On the footprint side, well, I said that we lost a couple of years for reasons everybody can understand. You saw in the back half of last year that we took some pretty sizable restructuring charges in the retail fueling business, right? That was the beginning of doing that, and that was possible because of all the work that the business has done in consolidating the platform. The problem that we had was we had 2 different brands that had 2 entirely different platforms, so they required their own infrastructure to build the product. Believe it or not, it took 3 years to consolidate the 2 platforms because it's a ton of work to do it, but it's consolidated now. So we don't need Wayne factories and Tokheim factories. We need a factory, right? So that just allows us to do it. You've also -- if you go back and look to the presentation, we've invested on the capital goods side of the portfolio, particularly in VSG. That is going to allow us to consolidate the footprint because of the amount of the automation that we put in. The capacity in the plants that we've done it has been expanded. And so you can just think about kind of smaller portions of the footprint will get consolidated behind it. Those are some examples, but it's two-pronged.

From this side. Andrew?

Yes, sure thing. So you talked about the growth, and that's a separate discussion. You guys are clearly doing better than the Street things. But what percent of the portfolio is having problems getting growth capital allocated to it? And how do you think about this portion of portfolio versus sort of milk for cash versus getting rid of it? And specifically, frankly, when I went to this meeting, people said, "Oh, Rich is going to talk about divesting climate and sustainable technologies," right? Like I can tell you how many people ask me about that. And you've clearly made a case how this -- the business is leading the growth, how it really fits into the megatrends. So maybe expand on that as well.

Yes. Well, I mean, when you run a multi-industrial, it's a never-ending battle of portfolio construction. And I think it would be naive for me to -- being an expectation for me to stand up here and say I'm divesting of something without actually having something in the works, right? That would be silly. Look, at the end of the day, we think we can extract value out of every part of the portfolio because you can see in the margin targets, none of them are coming down, right? So we're not in a position where we're pushed into a position. I could -- I'll tell you this that we have a very robust process to strategically evaluate these businesses every year. We don't fall in love with our winners, and we don't throw out the so-called losers if we think that the market is turning or we think that we can fix them. So it's dynamic. We could come in -- we can announce one day one of the higher-margin portions of the portfolio is being sold, not because we're asset traders, but maybe the customer base is consolidating, where the market structure is consolidating, and we view that business as reaching peak profits over time, and it's up to us to act upon it. So if we action a portion of the portfolio, you'll hear about it when, basically, we've signed the deal, quite frankly, not in advance of it. So right now, the total portfolio is going to increase in value. We're happy to keep everything in it and then just continue to recycle the total cash flows of the business into the higher growth, higher margin portion of the business, which is essentially what we've done over the last cycle.

Andy? Andy, okay.

So Rich, you were asked already about some of the conservatism around margins in a couple of the segments, so let me ask you about Pumps & Process just from the low 30s target. Obviously, that's been a business that's had a little bit more pressure. So maybe sort of talk about the conviction level there, why you think there's still margin improvement here from already close to 30%. And then just a separate question on cash flow. You didn't talk a lot about the 13% target. And obviously, mid-teens is what separates some really great premium multi-industry companies from not-so ones. So maybe you can talk about conviction level on getting there.

Okay. Let's deal with the free cash flow. There's no defined definition of free cash flow, and everybody does it differently. I think we've had that discussion before. So I think what we tried to do is give you all the building blocks, right, to calculate what the margin expansion at that conversion rate, what it does to cash flow at the same time saying we're not going to become more capital intensive, right? So I think it's an odd year because our target this year is actually higher than that for all the reasons that we can understand because of all of the post-COVID ramp buildup of working capital, and we're going to be progressively working that down over the 6 months. But at the end of the day, the story remains the largest single driver of free cash flow performance going forward is going to be on the back of margin expansion. We'll grind it down from a working capital point of view, put the fact to the -- so I think that if you take the pieces of the presentation that we gave you today, you put what you want in terms of the growth, which generally no one ever does, but maybe you should give it a try this time, put the growth on there and convert it the way that you'd like it, I think that you can see we get to kind of middle of the pack probably, right? Because let's be honest, the margin targets that we put out there are not best-in-class margins, but they're good and better. And that's, I guess, all we can promise to at this point as we -- without making any changes in the portfolio construction at the end of the day. And I think we have to be careful about kind of non-margin related performance and free cash flow because there are businesses where margins are extraordinarily high. To carry working capital is just part of their business model. So you have to be a little bit careful there. What was the other part of the question? Look, you know what? Kudos to the 2 of them in the back of the room. All we lost this past year on the biopharma side was the revenue at margin. Our margins did not decline. So the small decline you saw is margin mix just because biopharma got smaller in the segment. But I will tell you that the 2 of them protected all of their peak margins on an equivalent revenue base. We're going through a little bit of a clearing event. The businesses, go back to the slide, is growing nicely, so we would expect what was a headwind to turn into a tailwind from a margin mix point of view.

Joe?

Can you just talk about pacing of growth with the construct of the 4% to 6%? I think if you look at the back half of this year, what seems to be embedded is something like 3% volume. And so coming out of that, we think, a little bit more near term, what's going to drive an acceleration. And it also seems like what's implied might be that price can continue to go up after some pretty meaningful pricing, and so overall confidence in that as part of the algorithm.

Every time the Fed speaks, my confidence gets slightly shaken. But we don't have a lot of additional price in there. I think we've announced the vast majority of the pricing that we're going to do. We're going to be opportunistic, number one, and depending on market conditions, that may change, right, if, for whatever reason, input costs were to inflect up from here, which is not outside of the realm of possibility because if growth remains relatively decent, then one would expect the knockout effect on kind of input costs, right, which you'd have to accommodate in the price. The fact of the matter is, is that volume did not grow much at all last year, right? If you go basically unpack this robust revenue that everybody reported and then take out price, volume was relatively meager. So it's not -- there's almost this notion of all that revenue growth was a lot of tangible goods put into the system, and now it's going to have to deflate. Not really. It's the same amount of tangible goods. They just were a lot more expensive, right, because the core growth was 1% or 2% for the most part, on average. I mean, that's ours, right, so let's deal with Dover and not everybody else. So there -- this is a tough year to forecast for sure, right? We purposely kind of read the seasonality and said we're probably going to start out a little bit slow because everybody is waiting to see what's happening and being a little careful on the working capital side. And I think there's a lot of hope that inflation is going to come down, right? I mean, think about -- when we talk to our customers, a lot of our revenue is CapEx driven. And when we talk to our customers, by and large, over the last 18 to 24 months, every project that they did was late and over budget because everybody was just chasing the supply chain that rolled over into inflation, and you couldn't get the labor. And then you almost got it in the back half of last year where everybody said, "I'm worried on what's going to happen on the macro, so I'm going to be a little bit careful with my inventory. And then, by the way, I'm going to finish the projects I have in flight right now because this rolling wheel is just I'm chasing my tail here." And that's how we see the market today. So if we go through a period where those projects are completed, we're not hearing anything right now about CapEx that was going to be deployed in '23 not to be deployed currently. But as you can imagine, everybody is on edge with the macro, right? Everybody is waiting for a little bit of the shoe to drop, so there's an amount of caution out there. So I don't think that we're underwriting a lot of volume growth in the back half of next year. What we're underwriting is not a negative macro presently.

Steve?

Another way to ask the margin question, I mean, what would drive you to the low end of that range? You did the 35% over the last several years. You're talking about it being conservative. Why is the 25% on the slide?

Mix, right? If clean -- if Climate was to take off kind of like biopharma did on the portfolio, it's dilutive, right? It won't do 35% incrementals because we'll be chasing growth with so much investment, right? We'll take all the profit surely. But the margin mix effect in the portfolio won't be as robust as opposed to some of the higher if cryogenic took off. In a perfect world, we want CO2 systems, SWEP and cryogenic components to go simultaneously, and then in the aggregate, it -- mid- to upper portion of the range. So we leave ourselves 2 things. We leave ourselves a poor macro and not having to sit around a year from now playing Gotcha, right, with demand going down. I mean, it's not -- we don't screen out forecasting it, but it's not -- we can't eliminate it from the scenario. And I can't run these individual businesses saying, "You need to stop growing because you're giving us negative margin mix," right? If the returns were high, we're pedal to the metal.

Because every single one of those businesses had positive mix. So you're saying that on an absolute basis, if you do outperform in revenues and the conversion is a little weaker, you still kind of get to the same place on [ EBITDA ] basis. But putting 25% up there is not going to eliminate...

Exactly. I -- you know what? Steve, 25% is negative growth. That's what it accommodates, right? It accommodates a scenario that we're not underwriting right now, but these are through '25.

We used 35% plus, but then on the...

That's what I get for saying conservative.

On the free cash flow side, you did 13% last year ex working capital. So should we just think about it as 13% is the base, whatever you're going to grow by -- on an EBITDA basis, add that and then we can kind of figure out a little bit of working capital?

Yes. I mean, if you eliminate the liquidation effect of this year, yes on the run, for sure.

That's like a baseline that you're talking about with an expansion. Correct?

Absolutely.

Nigel?

Thanks, by the way. Cool gift.

No. We spend a fortune on it, Nigel. and it's baked into our margin targets.

When do you travel, you don't want to have big packs. So it seems like retail refrigeration is less noncore than perhaps [indiscernible]. I think that's probably a fair comment, correct or not? But let me go with this. So it seems like systems have got some real secular tailwinds. Cases and doors, not so much. So how separable are cases from systems?

It is separable.

Okay, okay. Good. And then on the volumes, we've had volumes last year. This year, obviously, the medium-term targets envisage mid-single-digit volume growth. So how confident are we with the Fed going Rambo on inflation that volumes will pick up second half of this year 2024? It just seems like -- it seems counterintuitive that volume growth will accelerate from here, not just with Dover but just in general.

Yes. Look, I mean, we can't call the macro over a 36-month period. We can call the macro, in quite frankly, rolling 4- to 5-month chunks if we're being absolutely realistic here, right? But at the end of the day, we're paid to call it on an annual basis in a certain way. And we've got to have a variety of levers to say if, but, what do you do, right? And I think in terms of the levers that we can pull here, we can capture upside, and we can capture downside. And so what's going to happen next year, like I said before, what we can lean upon is that we believe, if you go back to -- I don't want to go flying around the slides here, and I don't want to say megatrends again because it just seems so [indiscernible], but where are you? Did I -- where was it? Do you know what slide it is?

Which slide?

Megatrends? Anyway, I will answer the questions while looking for the d*** slide. There it is. Right? Look, the CO2, the heat exchanger, those are regulatory driven. It's not going to be -- the Fed is induced to recession. And so in total volume goes down. I buy that scenario to a certain extent. What we're trying to highlight, there are certain areas, cryogenic gas CapEx is coming no matter what. I mean, it's committed at this point, right? You can't get half pregnant building one of these facilities after a while. So I disagree with what the Fed is doing right now. I think they're going to get to the point where they break it, but it's all about somebody's reputation now and not the economics behind it. We feel that we've developed a variety of different avenues that are more regulatory driven that should buffer kind of the macro.

Josh?

So Rich, I like how you put up kind of the separate breakdown of the business of equipment components and the digital services. If you had to scatter plot, the opcos, where do you feel like you get best compensated for the equipment like macro volatility relative to like the rest of it? And where do you feel like, hey, we still have a lot of work to do on the cycle kind of peak to trough performance in equipment relative to the component or services pieces?

Well, I think that when we showed you the slide on ESG, go to that one, ESG, the one with the revenue streams in ESG as an example. Yes. There's the equipment side. We're actually negative equipment between '19 and '22.

The portfolio, like is there anything left that you feel like has an opportunity?

Well, we'd like to do that with a variety of other businesses. I mean, kudos to management team here. I mean, they were on it from a digital software point of view early, even before we were deploying what we've built from centrally. I mean, they did it on their own through inorganic investment, but they were on it from a business model point of view. And they were early adopters in e-commerce, which drove basically market capture on spares that they just never were able to harvest in the past, right? So we take this slide more or less, and I won't name names, but there's a variety of businesses that we have that are nowhere near that, where the equipment portion of the revenue stream is too high in our mind. It's not capturing the value of the installed base. So if you think about Maag, if you think about Belvac, if you think about fueling solutions, the upside capture, they've done like what ESG did here is significant, and it's margin accretive. I mean, everybody -- most of you guys are capital goods guys, right? I mean, parts margins here, capital goods here, right? It's no different in some of these -- in some pieces of this portfolio.

And then I guess, sort of similar to that on the R&D side, you show very low R&D intensity across the portfolio. But with the structure of the business, especially some of these kind of tiny platforms in the grand scheme of things, I'm surprised that the R&D leverage is that good. Like are there areas -- is there like a tail of businesses like aboveground fueling where your R&D budget is like 0? Or like how consistent is that 2-ish percent? And is there going to be upward pressure just given some of these areas of growth you're talking?

We don't capture it appropriately. It's a fight we don't have. We don't fight about anything. But it's -- you've got to be very careful about capturing R&D because it's a tax element of tax recapture of R&D spend. So it ends -- it tends to be very narrow, the definition of R&D. So on existing product, it never really gets captured as R&D. And the vast majority of our spend is kind of the continual development of existing product. So I think that what you can expect, and which is natural, is as you move into like the software portions of the business and maybe some of the higher R&D kind of capture portions of the business, especially what these 2 guys are working on that, you end up higher SG&A in total, but the gross margin should be significantly higher. So stepping back, when we look at these segments, naturally, engineered products should have lower-than-average gross margin, but lower than average SG&A just because their business is at scale, and that's how you operate them as opposed to other portions of the portfolio where gross margins are higher, but naturally, it's going to attract more spend to kind of revitalize and defend that gross margin. Net-net, you end up with a higher margin business at the end of the day. But we're comfortable running -- like I said before, we actually manage these businesses individually, not even by the segment. I mean, the segment is a reporting structure. We manage 18 individual businesses, and we manage them uniquely.

Joe?

This is good timing because this is the slide I actually wanted to talk about. It is pretty amazing, right, that bolded bullet around your -- greater than 50% of your adjusted earnings this year, aftermarket and digital. And I think you're right, Rich, I don't think lot of folks realize what was happening within this business on the Connected Collections side. And so my question is, as you're thinking about your pipeline of M&A, and then also potentially the resiliency of that 4% to 6% organic growth going forward through cycle, how has that changed over the last few years? Because it seems like you should have a little bit more visibility going forward.

Yes. I mean, I think there is a -- when you go back and look at the transcript and everything else, I mean, the bottom line is, I think, the Engineered Products segment has grown faster than the target that we put on it and the revenue growth. Our trailing performance is better, right, through mix of margin and pricing power over time. So again -- so at least, on the revenue point -- the revenue growth point of view, there's an argument to be made. Look, let's take a look at this business. Our revenue in 2020 should have better than it was. We just couldn't get chassis. I mean, we just sit -- I mean, I can't build -- body build anything if we can't put it on something. So until more capacity is -- comes away from Class 8 back into kind of -- I think these are Class 6, the work trucks, which tend to be the lowest margin business for truck OEMs, so they -- when they had the deficit of chips, it all goes into Class 8. That's where the money is, right? So we would expect progressively over '23 for us to get more chassis here. So if we protect those other 2 pieces, right, then revenue growth should flex based on that alone.

And the comment around M&A and what you're looking at in terms of digital/software-type acquisitions.

Well, I mean, it's a good slide. I mean, we like adjacencies. So we like established positions of core businesses where the customers know us and we know the customer. That's when we'll get into software. We're not entering to -- getting into software for software stake -- sake because a couple of reasons. A, valuations are crazy high, number one, and execution risk is significant. Running software businesses is entirely different than running what we would describe as our core attributes. We like it because there's a shining example of what it can do in terms of transforming a business. But we're not trying to transform ourselves into industrial software company. Adjacencies only.

So if I could just maybe ask you the flip side of that, right? So commercial refrigeration, you talked about maximizing margins, maybe selectively investing in the business. One of your peers, I think, is looking strategically at that business. Does it make sense for you to buy something that you can fix up, expand the margins? I mean, that's been like their bread and butter over the last few years.

You know what? If it was me, and I have a little bit of a reputation of having some guts, I would be very attracted to doing it. I just don't think the general reception would have the stomach for it.

Let's stick with the theme with adjacencies and also on biopharma because that's a big focus for today. You've moved pretty quickly with the single-use pumps. I would be interested in hearing more about the single-use flow meters, but talk about the adjacencies in this whole value stream. When I look at the skidded systems and say, all right, where are the other components? Most of them are really profitable, so you'd be attractive, but they also have some bigger competitors, which you said you don't like. So is it a target-rich opportunity here? Should we look at the skidded systems and say, here's the universe? Just kind of take us through the opportunity and the vetting process.

Yes. We're not going to go -- if you take a look at the slide that's up. We're not going to go get in our customers' business. right? We want to be a critical component supplier. Interestingly, the technologies that are employed in biopharma have applications outside of biopharma. So you don't have to underwrite a story of biopharma. You need to underwrite a story, and hopefully, my 2 colleagues today will help you with that, of a wider application of these types of technologies. Because you get to the point where you're too material to the chain, and you're slugging it out with some pretty formidable competitors. So if our customers are listening, we're not going to try to get into their business.

Rich, if you could just talk about like the M&A environment and what you're seeing now. Obviously, you kind of talked about what the challenges have been during the COVID and post-COVID period. I mean, we've started to hear companies talk about like private equity stepping away and maybe deals becoming a little bit easier to get done, but would love to hear your perspective on that.

Sure. Nobody's lending any money, right? So part and parcel to what's going on with the Federal Reserve, there's a significant amount of pressure in the banking industry to -- through a variety of different methods to not deploy capital. So -- and that's got a downward effect on M&A in total. The good news is this is not a new phenomenon. It's been going on for close to a year now. Our experience says that public valuations correct quicker than private valuations, and so you have seller's remorse, right? The salad days of 18 and 20x EBITDA, as the tide has gone out unfortunately at 5% Fed funds rate. So what we see in terms of availability at more reasonable value, what's available is more reasonably valued right now, which is good. So our expectation -- and I can't tell you the amount of deals over the last 3 or 4 years that we just got tapped out at valuation. I mean -- and look, everybody's got the reasons. I'm not calling out any individual, but the valuations -- I mean, to make return -- make our hurdle rates within our time windows at those types of valuations versus capital return to our shareholders, the math just started getting fuzzy, for lack of a better word. So we're -- pipeline looks good. And what's in the pipeline looks from a valuation point of view, reasonable.

Go ahead, Paul.

I'm curious about your 80/20 that you mentioned a couple of times. Is that like a corporate-wide thing? Some of your competitors with higher margins do it more kind of at a corporate level and push it down. How do you think about that?

Yes. We're just not big into branding. I admired Danaher who led the -- kicked it off in terms of branding Danaher business systems, and everybody basically did their own hybrid of it. 80/20 is nothing unique at all, right? Sell the products where the most demand at the highest margins and eliminate the ones that aren't, right? I think that the work that we've done here was to put in systems that allowed for us to do it far more efficiently than we were capable of doing in 2018, and that was part of a little bit of a journey. We had to mop up an incredibly fragmented IT infrastructure. We had to deploy a lot and are continuing to deploy a lot of different ERP tools. Getting this whole notion about e-commerce is incredibly important because it allows you to do SKU management centrally, it allows you to do pricing centrally when, before on a distributed model, you can imagine the millions of price discussions that were going on between salespeople and distributors about every individual order of 3 pieces of something. So it's not as if -- we're not -- it's -- what I tried to do in terms of the presentation today is to say that there was -- you had to underwrite a belief that we were going to change the operating model here in 2019. We had no track record of doing it, quite frankly. And we said this is what we're going to do. If you go back and look at the slides about the underlying investment, and you can measure it in just a number of FTEs, quite frankly, between 2019 and 2022, we've built a meaningful structure, right, which allows us to accelerate extracting synergies out of the portfolio, one of which is SKU reduction, right? Because SKU reduction leads to pricing management, manufacturing efficiency and footprint consolidation at the end of the day. I mean, there's a variety of spill-on effects from it, but we don't like to brand it. We just like to have a philosophy, and then we'd like to invest behind that philosophy, rather than go around and say, it's back -- tantamount to the discussion about ESG. We can go out there and say we're going to be net neutral in 2040. I'm not going to be around to deliver it, and the technology doesn't exist to do it. So we're not going to waste anybody's time doing stuff like that nor are we going to hide behind branding, right? We've got the tools, and those tools, even more importantly now, if there's any doubt on our ability to extract synergies from any M&A we do, go look at that toolkit. If we deploy that immediately upon acquisition, we can drive synergy capture in a very concentrated piece of time. We've come at it from 4 different directions. Forget the salespeople and the customers and everything else. I'm just talking from the back, taking existing business and basically introducing a significant amount of synergy opportunity.

Right. Let's just take one more. It seems like a second round.

Rich, you talked about LNG or, I guess, gas more broadly and hydrogen a couple of times. I think since you did some capital deployment there, IRA has probably thrown a little bit more gas on the fire for that. Like what are you guys watching specifically? How do you think about the timing? And is there anything around sort of order of magnitude that would be informative from where we are?

Look, it's got everything that we like, right? CapEx is being deployed into an area where we have an expertise in terms of managing those types of products. And right now, the legacy base is highly fragmented, right, so that's an opportunity. And the growing base needs capacity, which is another opportunity. So we can kind of -- our intent is to come at it from 2 directions. So one would -- could expect us to expand capacity, manufacturing capacity in this area over the next 12 months based on what we can see. We're just trying to make sure that where we're doing it is absolutely defensible, and we're making the right bets because you just can't -- the opportunity is so wide that you can't go for all of it. You've got to pick your spots. But I -- my expectation is that we will be investing in organic capital capacity in that segment likely within this year.

Okay. We'll wrap up the Q&A session here, and this also concludes our webcast portion of our Investor Day. Thank you, everyone, for joining.