Dover Corporation (DOV) Earnings Call Transcript & Summary

Excellent. We're on time. Thanks so much. Our next presenter is one of my all-time favorites, Dover, and the company's Chairman, President and CEO, Rich Tobin. I think Rich has a couple of slides, and then we're going to go into fireside chat. Thank you very much for being here.

I guess I should stand for the slide part, all right? We'll do, I think, two slides. One is just basically a reconciliation, how we ended Q1, and I can give you some comments on where we're tracking it in -- for Q2. I think the most important thing that we had talked about at the end of closing 2023 was the proactive work that we had done on channel inventory, so not just our own, but our OEM customers and our distribution. And then if we've done that work correctly, that we would expect to see an inflection in order or booking rates in Q1. And that's what we saw. So unlike last year where it was difficult to get a feel for fundamental demand because you see the headline figures of revenue, but what you can calculate is the headwind on the destocking factor. I think our general commentary now is we think that inventories are low in total. We don't see kind of stocking yet. What we see is basically pull through. So when you look at our revenue figures, and the growth rates associated there, they should be a reflection of what the end markets are doing, not because of inventory build or depletion from there. We were reasonably active on the portfolio. I'm sure those -- I'll leave that to Andrew in terms of the questions when we get into it. We did a couple of very interesting acquisitions. We sold something, which we don't do that often when we sold DE-STA-CO in March of last year out of our Engineered Products segment. And then you can see the guide, which we did not -- we were left in place for 2024 after the quarter. I can tell you anecdotally that what we've seen in Q1 has continued into early days of Q2. So nothing dramatically better, nothing dramatically worse, just kind of like a steady roll forward. I'll also tell you that in terms of the seasonality of our earnings, that Q2 and Q3 are very important. Actually, our forecast -- what we've baked into our forecast here is a relatively unaggressive Q4, right, just because of visibility being what it was when we gave the guidance out. So if there's any fear about back-end loading, to the extent that we hit our Q2 and Q3 numbers, I don't think that we're going to have much of an issue. And hopefully, by then, if the order rates continue to build and the macro is maybe a little bit better than it is right now, that we'll be in good shape and then we'll decide what to do with Q4. If we think the '25 looks good, we may, from an inventory position, run harder in Q4 than what's planned right now, and that would be good for absorption in Q4, but we're going to wait a little bit to see what fundamental demand looks like before we make that decision. I won't spend a lot of time here because I'm sure that Andrew's got lots of questions. We're a multi-industrial. So everybody understands the endless discussions about portfolio construction, which we're willing to take on any time, but a lot of what we do is also organic investment in product development. And we're showing you four of them that we're kind of excited about right now. So U.S. CO2 systems, we are the market leader or coleader in European installations for retail refrigeration installs in CO2. We've transferred that technology from Europe to the United States and repurposed the factory for that over the last 2.5 years. We are now the market leader in the United States in that particular application. What's interesting about it is in Europe, these are bespoke systems. So they're configurable and for lack of a better word, what we've done is platformed this product for the United States. So we think from a manufacturing point of view, this is something that, from a margin potential point of view, because it's been platformed, we're going to be -- we're going to have a factory that runs three platforms and for lack of a better word, it's large, medium and small systems for CO2. That is legislatively driven in the U.S., and we can kind of talk about that in the Q&A. U.S. heat exchanges, I know there's lots of discussions about heat pumps in Europe and everything is going on. We're one of the primary suppliers of brazed plate heat exchangers that go into that application. So it's a bit of a headwind right now in '24, but that's about 30% of our revenue goes into heat pumps. So the other 70% goes into a variety of other applications. We expanded capacity in North America proactively a couple of years ago because we felt that those types of technologies were going to slowly be adopted in the U.S. And so far, so good, we're right. So our bookings are up 25% versus last year, and we've got ample capacity to win in that marketplace. Thermal connectors is something we've talked about recently. These go into water-cooled applications and data centers. We have a connector business. So a lot of the press that we've gotten about this business is biopharma. But as those of you that came to our Investor Day a year-plus ago, I guess, we had purpose built a new factory for the non-biopharma connector business. So that -- so we've got the installed capacity. This is a product that has to be made in a clean room. So it's very similar in terms of the manufacturing process that we have for biopharma. And we're pretty excited about the IP that we have the product in the product and the spec wins, and you can take a look at the revenue CAGR, albeit off a low base, but we're pretty excited about it. And then in biopharma, we leave that in there because we've had 2.5 years of post-COVID depletion on the inventory that got built up into the system, or orders turned positive in the latter half of last year and are positive this year. Our forecast accommodated, not a snapback in volume, so it was pretty conservative. So to the extent that this gets better throughout the year, that's kind of upside potential in terms of margin earnings potential. And I think that's the slides, and we'll go to Q&A.

Excellent. Okay. So why don't we start with just sort of drill down on the growth markets. So as I said, sort of CO2 refrigeration system have far lower greenhouse gas risk than traditional HVAC refrigerants. And as I said, Dover is the market leader for CO2 systems in the U.S., #2 in Europe. Roughly $200 million in revenue. You've outlined CAGR over the last 5 years. So you did talk about legislatively driven growth in the U.S. Can you just discuss in more detail what specifically are the regulatory requirements in the U.S.? And what does this mean for the growth of this business over the next several years?

Right now, it is state driven. So California, surprise, surprise has adopted it on all new builds of retail refrigeration. So if you were to build a new store in California, legislatively, you have to put in a CO2 system. You cannot use a legacy application. And then we've seen kind of a rolling adoption from there between Wisconsin and Massachusetts and pretty much all the places that you would expect to kind of follow on from California. More importantly, everybody kind of knows it's coming now. So you see a lot of early adopters, especially in small form applications that are just deciding legislative or not, we're going to choose this technology and put it in. So it's going to take years for this process to take place, but we feel real good about the fact that this business is going to go from nothing to approximately $100 million of revenue in North America this year alone, and these are just with early adopters. So the market potential in terms of its size is significant. And as I said, we built or repurposed an entire factory to accommodate this volume. So right now, we're carrying the depreciation cost to the factory we've built and then -- and we're growing into it. So we would expect as volume grows and our margin, as we absorb those fixed costs, will continue to get better. So feel good about where we are in terms of IP and market adoption.

Got you. And so when would you think sort of the big players going to start looking to standardize their offering nationally? Are we 3 years away, 5 years away?

Well, there's a lot of players in the market and -- but you need to understand the -- everybody doesn't sell into the total marketplace. So if you think about cold chain warehouses, that's -- there are different players. We're in there, but that is not our primary market, but there are different players there that would like to enter into CO2 systems there. Then there's retail food, which is basically our wheelhouse. That's what we're in. And right now, out of our kind of historic competitors in systems, I think that arguably, we're a couple of years ahead in terms of footprint and in terms of installs. I would expect, over time, some of the European competitors will try to enter the U.S. market. But to the extent that we launch all of our platforms successfully and have the standing capacity, I mean we'll just going to have to...

I was just -- my question was more like when somebody like Whole Foods would -- yes, because we've done a tour with you guys over the years, and Whole Foods showcasing latest and greatest from Dover. When does Whole Foods just starts thinking about sort of rolling it out nationally?

Part of our volume -- or the way I could describe the volume in North America is early adopters that have just chosen, we're going to get on the front foot. It's a marketing issue, right, in terms of green and everything else. And then you've got everybody else that's putting in test stores.

Okay. Got you. Okay. Thank you. And I guess, just to think about the margin, it seems that right now, you have a lot of sort of fixed cost absorption because of depreciation. But once the volumes gets up, it sounds like -- how would those margins compare with the rest of climate and sustainability?

It will be accretive to the segment margin.

Excellent. Also, and once again, I think we've seen at Acme, you've built up a couple of offerings to participate in the hydrogen infrastructure build-out. You have flow control components for liquid hydrogen, fuel equipment and compression equipment. I think there's a big debate what's going to happen with hydrogen, but are you starting to see early awards from the $7 billion of federal funding for hydrogen infrastructure? And what is the outlook there?

We're quoting like mad. But as you know, these are very long tail, multibillion-dollar projects. And I would kind of recast what we're trying to do. Hydrogen is part of it. When you think about cryogenic applications, which is CNG, LNG and hydrogen, require a variety of special application valves and piping and a variety of subcomponents that go into these systems. That's where we've been acquiring. So into that complete space, there is hydrogen gets talked about because of the reasons that you're bringing up, and we're a participant there. But it's more around this notion of thematics, who's betting on what? You've got a variety of people betting on electrification. We're upstream from electrification, right? You can't make electricity out of nothing, right? So we'll be making big bets on kind of the bigger -- the wider gas complex. And we do that either from subcomponent side or from the compressor side. And that's part of the reason we did the acquisition of FW Murphy last year.

Got you. So for your hydrogen sort of falls into overall cryogenic offering?

In order to do -- you have to have an understanding of cryogenic applications even to participate in hydrogen.

Got you. But do you think that the skill set and material size, that's transferable? That's how we should think about? So you can scale it up. You can scale up your cryogenic offering into hydrogen?

It's what we do, right? The subcomponents, it's machining, it's that type of thing.

Got you. So maybe just the last one, we had Vertiv earlier today. So apparently people are excited about liquid cooling. I don't know if anybody heard about it here. But you do make the connectors that make it work. You are getting spec-ed in with the server OEMs. I think booking growth over 100% in first quarter. So how excited should we be about this opportunity? And just for reference, how big is colder products today, the connectors business and how big can it get?

Sure. Sitting here today, we think it's about a $30 million opportunity for us, but you have to understand we're selling into basically R&D applications presently, right? So there's this huge amount of capital coming for the build, but you can imagine everybody's trying to test these builds right now. So we started in this business years ago because the only application that was using liquid cooling in the past was supercomputers. So we've been selling these connectors to IBM and Cray for almost a decade. So we've been working on this a long time. Now that water cooling has come to kind of data centers, it gave us kind of a little bit of a head start, particularly around the IP in this particular case. So we feel good about where we are in terms of the specification with the leading chip makers. Market sizing is undetermined right now because the numbers that are flying around -- it wasn't too long ago when we were talking about these batteries for EV applications and the billions of dollars that didn't turn out to be much at the end of the day. So I think we're going to be a little bit careful about sizing the market, considering the fact out of the entire bill of materials for a data center build-out, we're not exactly a material component of that. But on the other hand, we think that a lot of what Dover does is to find a nichey kind of application product that's got a lot of IP and a lot of barriers to entry around it. I think that we feel pretty good. So hopefully, $30 million for '24 is conservative.

And so -- and who would you be working with? Would you be working with nVent? Would you be working with Vertiv? Would you be working with NVIDIA? Who do you sell your product to? Delta?

We've been working for years with the chip manufacturers themselves because in their R&D, they had to do the work to how those chips would operate in the ecosystem. Now we're working with basically are going to be the builders of those systems without naming names.

Okay. But is it fair to assume that because you've been here for a while, you have broad exposure to the builders of the systems?

We think that we've got the spec from the main chip manufacturers, and we've got a product with a lot of IP around it, and we've got standing capacity where we could quadruple volume within a relatively short period of time.

Okay. Okay. So you could quadruple? You have quadrupled? Sorry.

Could.

Okay. Okay. So let's talk about biopharma. You've been dealing with the destock for 6 to 7 quarters, and you've alluded to sort of sequential booking growth, book-to-bill, 1.08. So the question we do get from investors is, okay, it's bottom. But what's the growth outlook here? You said you sort of alluded fourth quarter, it could be potentially better. But what should we look at for a turn in this -- to get more confidence in near term?

Orders. Orders at the end of the day, right? No one -- we are a subcomponent supplier into a system that is sold to biopharma companies that use these incubators to make drugs at the end of the day. What the growth rate has been over the last 3 years is not determinable because of the amount of inventory that had been built up in the system. So -- and we don't have the access to our customers' customers and how often they're running those. So we can only do what you would do if you're doing research into the marketplace. What we do know is once we get -- start getting orders, that means that the inventory has been depleted out of the system, and then we can get an understanding is as those go orders come in, what is the actual fundamental growth rate. So it's early days. I think the good news is two things, is that our business shrunk quicker coming out of COVID, right, because of the -- we happen to have just built a brand-new plant, and we won, from a market share point of view, a significant amount of that opportunity that we monetized, which was great when it was going on. But when the market rolled over, because we're a subcomponent supplier, we depleted first. Now we're leading out. So if you look at the differences between what we're saying versus one of the system builders are saying, we're being a little bit more positive just because we're basically on the front of the return of the tail at this point. And it's growing.

And just to understand, I think I was under impression that there is sort of an FDA-related expiration date.

There is.

And when is it?

It depends, it's predicated upon the shipment date. So it depends. All I can say is if you look at our volume over the last 2 years, we haven't been shipping much. So that has been part of the depletion of the inventory.

So that means over this summer, you sort of should be thinking that the timing starts being a factor there on expiration as well.

It's been a factor already.

Okay. Okay. Excellent. And just on margin, Pumps & Process Solutions segment margins sort of drove the biopharma wave to 34%, and were 28% last quarter. And biopharma was all organic. So -- and where do you start your career?

Here?

No, no. Have you worked for onset?