Dover Corporation (DOV) Earnings Call Transcript & Summary

Great. Moving along here with Dover, CEO, Rich Tobin. Rich, thanks for coming.

Thanks for being here, Steve.

I know how much you love March this time of year in New York. It's beautiful, and seeing everybody. Maybe just to kick it off with a bit of a state of affairs in the near term, I think you had said at a recent conference that the order rates in the first quarter, I guess, what happened in the fourth quarter flowed into the first quarter from an order rate perspective, I believe, was the comment. Maybe just update us on what you're seeing out there given everybody is a little nervous about the macro.

Yes. I mean that was 3 weeks ago now. We just closed February. Order rates are on the same trajectory. We are pretty much exactly where we thought we were going to be 2/3 of the way through the quarter. So, so far, so good.

All right. Great. Any questions? No, just kidding. So on -- just on the businesses, maybe we can delve into just starting with maybe the refrigeration -- the food and refrigeration segment, kind of a bit of a tale of two cities over the last year. Maybe talk about the growth business there and then the ones that are lagging and what you're seeing in that segment as a start.

Sure. On the core refrigeration business or the traditional business that we had, which is retail refrigeration equipment, Q1 tends to be a little bit slow. We expect to be fully booked for Q2 and Q3 probably by the end of this month. On the CO2 systems trajectory, I think we targeted for that business to go from what was zero 18 months ago to close to $300 million in revenue, and we're on track to deliver that. So as the year progresses with the volume on refrigeration, mopping up the fixed cost and the margin mix on the CO2, it will be a good year for that business.

And I guess on the refrigeration side, is that an area where you'd think you'd see potential deferrals and things from customers given the uncertain environment? Which one of those businesses...

Yes. I mean at the end of the day, in uncertain environments, the businesses that we have that are levered towards CapEx are the ones that we would worry about, right? Because at the end of the day, kind of the ongoing replacement and consumption types of businesses that we have, those are for installed operating units. So it just gets consumed. A lot of that goes through distribution. It's the CapEx-related business, whether that's vehicle wash or refrigeration equipment and some of those, those are the watchouts. So if the short-term issues that we see with the equity markets gets us -- gets our clients overly concerned, we'll keep an eye on it. We don't -- like I said, we don't see it at all right now. So order rates are good and a reflection of how we closed last year and what we said at the beginning -- or at the end of January, we put our guidance out there. So they're watch items at the end of the day, but right now, they're not reflected in our order books.

And when it comes to the other businesses there, Belvac and -- which is the can-making equipment, as well as European heat exchangers with the SWEP business, those were 2 of the weak ones last year. Are you seeing any signs of life, stability? Any risk of downside in those?

Well, I mean, there are 2 different kind of stories at the end of the day. Belvac was 100% levered towards can-making equipment CapEx. And generally speaking, the can makers spend money at the same time and then they stop spending money at the same time. So what I can say about Belvac is for all the money that we made from '19 to '23-ish, we've bottomed now. So the comp on Belvac this year is relatively easy, meaning it's not a headwind that we've got to deal with. On the heat exchanger business, I'm sure that you all understand what's been going on in the heat pump market. So we rolled that up with everybody else and then wrote it down from, I guess, August of '23 through '24. Again, we called the bottom of that market in Q4 of last year. So our book-to-bill is over 1 in that business now, and we'll follow along with the heat pump manufacturers as we go from there. At its peak, heat pump revenue in that segment was about 38%, 40% at peak. So it's not the entire business. So there's other portions of the business, whether it's district heating, whether it's data centers and a variety of other products that are actually growing and growing quite well. So I think what we said at the end of January that SWEP has got a tough comp in Q1 and then at that point, we'll roll it over and we'll comp pretty good for the balance of the year.

So in this segment, it's feels like this is emblematic of where you guys are. With the growth businesses like the CO2 business continuing, I would assume you have some pretty good visibility on pretty strong growth there this year, double-digit growth in CO2?

Without question.

Right. So the growth business is growing and some of the other businesses, more stable and less of a drag. Similarly, at the pump -- on the pump side, this business has gotten a lot of attention over the years given the high margins. What are you seeing on the -- at colder just to start off on the growth side?

Looks great. I mean right now, on the biopharma side, we had been projecting in the low teens of growth. We're actually clocking at a better pace than that. Now it remains to be seen how that goes from here. Whether that is a kind of a restocking after multiple years of destocking at this point, but we'll take it as it is, that low double digits right now. And then on thermal connectors, I think that we're up 80% or 90% right now. So that business is the thermal connectors that go into data centers. It's doing really well. Both those businesses, the biopharma is margin-accretive to the segment. The thermal businesses will become margin-accretive as we expand the capacity. But we're -- we have enough standing capacity to supply even the most buoyant projections about data center CapEx going through the next couple of years.

And how are you seeing that business ebb and flow? You've talked about the lead times. You've got visibility on the construction of these things, but the lead times of the actual equipment that's purchased can be pretty short. What are you seeing there?

Yes. I mean it's super interesting. At the end of the day, you would think that, that amount of capital being deployed would be organized capital that you would run -- you would want to make sure that you had all the component parts you needed in the system to make the delivery dates. And that's not really how it's turned out because everybody is trying to find their space between the builders or the deployers of that capital and then the EPCs that are actually building subcomponents of these big systems. So it's actually turned out to be a very short-cycle business. That's not particularly problematic for us because we had built a special-purpose plant almost a year in advance of it. So right now, lead times is a critical factor, and we have the shortest lead times in the industry.

And then on the polymer processing side, the Maag business, that's also been a headwind. So kind of similar to the other segment, you have a pretty nice growth business and then one that was down last year. Are you seeing any risk there? Or is that pretty stable?

It's not going to shrink in 2025, and it's basically been -- that's been built into our forecast. We still love this segment. We would like to be an acquirer in this segment. The margin profile in our particular position is a leadership position there. We can take some limited amount of cyclicality because it is CapEx-driven at the end of the day. But the business from a top line perspective is not a headwind that we have to overcome.

And then moving on to clean energy. This is the retail fueling side as well as your cryo business. Again, another segment where there's, I guess, probably a bit more growth than the others. There's not the drag businesses you had last year, at least. Maybe talk about those 2 segments and what you're expecting and seeing there. Any signs of risk of CapEx on this side of the house outside of car wash?

Nothing's riskless at the end of the day because a portion of the business is CapEx-driven. But having said that, we've got a lot of wind in our sails that are not revenue-related. A lot of the restructuring that we did in '24 is in this particular segment. So the roll-forward, we'll see in '25. We've purchased a variety of different companies in the cryogenic space. We believe that we're co-leaders, I guess, is the way I would put it, globally in terms of components there. We are going to enter into a phase now where we start extracting synergy value out of all those acquisitions. Generally speaking, we buy relatively small companies that are a lot of times single product companies. We leave them sit for a period of time. We upgrade their IT systems, we do things because we're a public company. But we want to hold on to the management team, and we want to get an understanding of the customer relationships. Once we've got that stabilized, then we can move into the synergy extraction phase. And in this particular case, there's a lot of things that we're working on footprint-wise, right, because we've got a lot of small companies that we're building a platform with. So my expectation is that we're going to have good growth in that segment this year. We're very interested to see what the outcome of the big meetings in Houston that are going on this week in terms of CapEx plans for our customers. But then I would expect that you're going to see us taking some restructuring charges in the back half of this year, which will be a benefit to '25 and beyond.

And the growth drivers there, any risk in this segment from -- or opportunities, frankly, from the change in administration and whether the IRA gets cut or these EV mandates? Any kind of influence on your business that you're watching?

Well, like I said, I mean, the administration is in Houston today. I would expect the current pricing that needs -- there needs to be something the administration does to kind of drive the growth of the investment they're looking for. So things like bonus depreciation and things like that are very important to the energy sector. So whether it's pipelines and approvals or bonus depreciation, I would expect that coming out of the meeting in Houston this week, we'll have a lot of positive answers about that. Now we have not built that into our forecast. That was built into our entry in a bigger way into the gas complex because you hear a lot about electrification, you hear a lot about a variety of different themes. At the end of the day, we're making a bet that the low-cost precursor of energy demand is gas and that's why we've spent the last 3 years deploying a lot of capital there.

And so that business is still -- the cryo business still has a nice growth trajectory in front of it, double digit?

Absolutely, absolutely.

You're not seeing any major like air pockets or risk there or anything like that?

Okay. I mean like any business, it's choppy at the end of the day. But we're making a decade bet here in terms of the market positioning and what we think the growth is going to be for the gas complex in total. So yes, I think that our expectation and part of what's driving our guidance on the top line, a big portion of that is driven by that particular segment.

And then just for Engineered Products, what's left of Engineered Products, this would seem to be probably a bit more of a cyclical segment. What are you guys seeing there for this year?

Well, look, we divested a big piece of it last year at arguably a very good price. So we monetized that asset, which is the reason that we've got so much liquidity in our balance sheet right now. I think that the military business that's in there is going to do really well this -- over the next couple of years, all things being equal. The vehicle lift business is a little bit of a watch point because back to your earlier questions, that's kind of CapEx-related and it's probably one of the few businesses that we have that has exposure to the consumer at the end of the day. So we're keeping an eye on that. But what we had built into the forecast for '25, there was not dramatic at the end of the day. So I think that even if that was to be a little bit weak, we'd be able to handle it.

And so all of these somewhat within this 3% to 5% range in any of these segments outliers as you look out to '25 and as you evaluate the order rates that have come in so far in the first quarter?

On outliers?

Yes.

Look, I mean, at the end of the day, anything -- any growth that we get out of Pumps & Process Solutions because of the conversion rate, it's worth $1.5 of $2 of revenue in any other particular segment. So to the extent that we can drive that portion of the portfolio, it's meaningful to the bottom line.

And to the extent that you have these orders continuing here into the first quarter, are you confident enough if the orders hold up that you'd start to talk about the higher end of the range on growth? Because you have -- you've insinuated in the last call, you've talked about how you probably could have raised the guide, but there were some ForEx headwind and things like that. So...

Well, implicitly, we did raise the guide, right? We had 150 basis points of FX headwind, and we did not reduce the guidance that we put out back in November of '24. So I'd rather look at it that way rather than we could have raised it again. Look, it's quarter-by-quarter. We're booking into Q2 now. We're -- other than the really, really short-term, short-cycle businesses, we're booked for the quarter right now. So all we got to do is deliver the quarter, hit our numbers, and we'll move on to the next one. So let's not get excited about talking up the full year until we at least close 1 quarter.

And are you seeing any elongated delivery requests or anything like that? I mean 3M was just in here talking about that. You guys obviously have a very different type of business. But anything like that, that you saw through the end of February here?

Well, I mean, the administration has made the weekends interesting with the tariffs on, tariffs off. And so whether that has been time well spent or not, we'll see. No, we don't really see a lot of prebuy. We haven't done ourselves a lot of prebuy. The only thing that we did is at the end of Q3 of last year and the beginning of Q4 last year, we went long in metals, so copper, stainless steel and a variety of it. Because we had built our forecast and gave our guidance, we said, "Well, you know what, let's..." And at the time, historically, metal prices were pretty advantageous. So we went long and we're covered now largely through the end of Q3 of this year. So no matter what happens with tariffs, at least right now, we've got financial instruments that allow us to deal with that if that becomes a headwind.

And can we just talk a bit about tariffs?

Sure.

What's your exposure? And are you -- how are you reacting?

Generally speaking, we're a proximity manufacturer, so we don't have long supply chains. We tend to look at tariffs vis-à-vis our competitive set at the end of the day. So each individual business has a group of competitors. And then we look at, are we advantaged or disadvantaged vis-à-vis those competitors and can we take advantage of situations where -- when we can or if we're disadvantaged, what are we going to do about it to the end of the day? So we've tried to monetize all the traps of what we bring out of China and Mexico so far and begun to run the numbers on Europe. I can tell you that we don't import anything from Canada of any quantum. The Mexico one, we could either eat it or pass along in price. It's not that large at the end of the day. And we would expect from China, we're pretty much in the same boat as all of our competitors because where else are you going to get basic electronic goods. I mean that -- it comes from China or it doesn't get for anywhere at all. And from an advantageous point of view, there are certain businesses that we have that we saw from the first time of the Trump tariffs that we were in an advantaged position by being a proximity manufacturer. And to the extent that we can take advantage of it, that's terrific. So we'll see.

And where would that, the -- as far as having an advantage, where do you think you're...

We've got competitors -- yes, we've got competitors in certain business lines that 70% of the production is in Mexico. And it's virtually all exported into North America. So if you believe those tariffs are real, and we're a domestic manufacturer, then we've got an opportunity there. But it's super granular. But we don't have to go business by business. So -- but we look at that at the end of the day.

And any impact that you guys have from a federal funding perspective? Anything you'd look at and say, "We're exposed to a market that could get pared back?"

Oh, not that I'm aware...

DOGE.

No DOGE issues that I'm aware of. I don't sell -- other than military equipment, we don't sell anything to the government of any quantum.

Right. So you guys had talked also a couple of weeks ago about your incremental margins. Historically, 25% to 35% was, I think the algorithm you guys had guided to. But you kind of clipped off the low end of that range, and you're now talking probably more like 30% to 35%. You're doing 40% on a core basis this year. What was the driver of that change? And maybe just talk about the building blocks for that algorithm.

Sure. If we do everything right, which, unfortunately, we never do everything right, but the way that we run the portfolio, every year, we should be working on self-help actions to drive productivity that have an impact on margins in the next year. So we should always be building a bank of, you can call it, restructuring or whatever you want or efficiency or anything else that we get the roll forward benefit. So last year, we did a lot of restructuring in our European footprint in clean energy, and we've got a roll-forward of $25 million, which is pure profit to the extent that it all -- the roll-forward would happen. So that's part of the reason that's driving margin this year. And then either through M&A or organic investment or growth platforms, those are all margin-accretive businesses, so this notion of mixing up. So where we're deploying capital, if we're doing this correctly, should be margin-accretive to the consolidated margins of Dover. And if you go look at what we've done in M&A and what we've done on CapEx, we pretty much have done that over the last 5 years. So over time, we would have the mix-up benefit. We'd have the restructuring benefit on the roll-forward. And then, I guess, the other portion would be if we were to do a disposal and it was a margin-dilutive business, then again, you would get that roll-forward. And that's a playbook that subject to timing and availability, that's the way we run this portfolio of businesses.

And as far as the pricing aspect of that, what do you assume in there every year?

Yes. I mean we haven't -- if you go back and look over the post-COVID pricing, we have not been leaders in that regard. We manufacture a lot of subcomponents. So we don't have a lot of consumer-facing businesses at the end of the day. The consumer is the one that's really been eating all this inflation in terms of pricing. So we've been price/cost-positive post COVID. But when we comp ourselves to some of the other industrial companies out there that have consumer-facing businesses, we're no by nearly a leader there. Our expectation this year is to be price/cost-positive. All the pricing is out and has been out in the market. So it's not like it's on the come at the end of the day. And like anybody else, we use pricing as a way to kind of manage backlog at the end of the day, right, meaning kind of price increases that become effective in June, can you drive the backlog to get the industrial absorption and whether you realize the price or not becomes irrelevant because you're actually getting the benefit of managing the industrial base more efficiently.

When it comes to portfolio, you guys have been active on both sides. You have a pretty significant opportunity to deploy a few billion of capital over time. I think it's 4-plus if you add up some appropriate leverage. What's the current state of affairs in the M&A pipeline, just to start?

Sure. The pipeline is full. But it's -- I'd described it as like a lot of salmon waiting at the bottom of the river and waiting for somebody to basically set expectations for multiples going into '25. So we've had really one meaningful transaction in the industrial world this year. I think it went off at 15 -- between 15x and 16x EBITDA, so a pretty healthy price at the end of the day.

You're talking about the deal?

A deal that's out there. So that's pretty healthy pricing. Now that was kind of pre-equity markets moving lower. So does that put a break on it? We'll see. But the good news is a lot of that stuff has to come. A lot of it is coming out of PE. It's probably 2 years too late coming to the marketplace, we shall see. We've got our fingers in a variety of different pies of the ones that kind of everybody knows about, for lack of a better word. But we, for the most part, do a lot of proprietary deals that don't come to auction, and we've got a good handful of those. So we're going to be as disciplined as we always have been in terms of M&A in terms of the pricing. But we are highly liquid right now. So it's not like that we're constrained from a balance sheet point of view.

And as far as that decision to either do a deal or buy back stock, I mean, your stock has pulled back a decent amount. Are you -- does that get more attractive here? And historically, you've been pretty aggressive and done ASRs. What's the mindset around buybacks?

I think that what we said when we sold ESG at the end of Q3 last year and gave our guidance that we -- that our priority would have been -- our hierarchy of priority is always internal investment. And if you go look at our growth platforms, I think 4 out of the 5 are organic investments that we didn't buy, one is inorganic at the end of the day. The second priority would be M&A, and third priority would be capital return. But I think what I described it at the time was going into '25 that we had a very good insurance policy if there was to be a dislocation in the capital markets and that we'd be opportunistic as we have been in the past. And I think that, that is absolutely on the table.

Okay. And as far as divestitures are concerned?

We're not a forced seller at the end of the day. But to the extent, we have a very clear-eyed view of what every business in our portfolio is worth. So if you're willing to engage on that basis as opposed to, boy, if you sell this, your margin will go up and then you'll trade higher kind of stuff that we generally get that we reject at the end of the day, yes, look, at the end of the day, we were -- we sold more in revenue than we bought last year. But I think that if you take a look at the multiples that we got for those businesses, they were above what we would seen to be the sum-of-parts analysis in the particular portfolio.

And I guess, in your view, is that portfolio churn necessary to get yourself to a bit higher multiple over time?

Necessary, no, because you can just outgrow issues at the end of the day, right? I mean there are businesses that are perceived to be low-margin businesses but don't require any working capital so the ROIC is actually terrific. And right, that is kind of why we fought off the cell refrigeration mantra for 5 years around here because the ROIC on that business is -- especially at the margins there, it is -- today is really good. So that's the way that we view everything in the portfolio. So if it's margin-dilutive, we can grow away from it over time. Does that accelerate if you get -- if you monetize? Sure, it does. But we're not going to accelerate it just to dress up the optics of the margin of the total portfolio and leave value on the table, I guess, is the way I would put it. The only time that we would do that would be if we were to lever up because of M&A, then you would have optionality of delevering by monetizing assets in the portfolio. But clearly, we are very far away from that scenario.

How much of the portfolio do you think is stuff that you would -- if I gave you a good price for it today, you'd be willing to part ways...

Well, I guess it depends, all of it, really. I mean it depends.

You know what I mean, but...

I know what you mean, but I'm giving you the honest answer, right? I mean we have got varied portions of the portfolio that are worth a lot of money. If you want to pay a 45% premium on that, I can't not say no.

Got it. Okay. Any questions out there? Yes, right here first and then back there now.

Just on the heat pump side, do you have a sense of how much the IRA tax credits pulled forward demand and kind of what the other side of that could be if those tax credits were taken away?

You're talking about U.S.? Our volume of U.S. on heat pumps is marginal at best. The vast amount of the volume is in Europe, and that is legislated country by country, and it's all over the map right now. So what happens going into the future, we shall see. I think that the current administration, we'll see what their posture is. I mean the bottom line is there needs to be some scale built in North America for heat pumps. To get to a price point, you'd have to have energy costs come up and you'd have to have volume leverage bring down. And then you get into breakeven in terms of transitioning without IRA or anything else. And we're a little bit away from that right now. I mean energy costs are just not going the right way for heat pump adoption, other than like the Canada and the upper belt of the U.S. where it's really cold. Yes. Look, we've got -- for us, we're capacitized for the North American market. Right now, it's not heat pump-driven. It's a lot of bigger units that go into district heating and into data centers right now. But we've got capacity in Tulsa. To the extent that it grows, we can support the who's who would talk about bringing heat pump technology to North America at a meaningful scale.

I came in a little late. Sorry, I apologize if this question was addressed. But about a month ago, at a competitor conference, you made some fairly positive comments about short cycle orders and sort of said, "Hey, things are continuing, and it wasn't just a blip in January." Are you still feeling that way given all the volatility we've seen? Or has the needle moved a little bit?

Well, you could imagine that was Steve's first question, but I'll repeat it.

I apologize. Sorry, my morning meeting.

Yes. I mean we just closed February, and orders are at the same trajectory that we exited last year and what we saw in January. So, so far, so good.

It was question 1 through 6. Are you -- what your take is a steamed business leader in this country? What's your take on what's going on out there? And how do you and your Board discuss a playbook? Or just how are you approaching all this?

Fundamentally, I think that what is being tried is correct. It's always the messaging is always messy. But I think the second time around, I think everybody is a little bit more comfortable with the messiness of the messaging at the end of the day. You and I have talked about this before. If you go back and look at core growth in industrials, it's a general comment, right? There's outliers up and down in there. And you look at unitary volume growth over the last couple of years, it's been marginal, right? There's been a lot of price that's gone through and not much in units. And at the end of the day, what we need is demand, right? And I think that what is being done in terms of trying to deal with the deficit and dealing with government spending being the driver of GDP is not a sustainable economic platform. So yes, at the end of the day, I don't want to spend my weekends talking about what's our exposure between Mexico and the U.S. and then Monday morning being told never mind. But I think fundamentally, what is being tried is, I would agree with it in total. And at the end, we would like to see real kind of business activity GDP growth rather than kind of here's a bunch of cash floating into -- from the ether or from the treasury into the economy because that's not sustainable.

So I guess from that perspective, it feels to me like less confidence near term because of just all the uncertainty. But like as a capital allocator and decision-maker, you do have some, for lack of a better term, faith, which you think it's the right move, you think things will work out. And so you're probably less apt to like really turn the screws and cut things today and see how it plays out, which is kind of the feedback loop that people are worried about.

Look, I think that we were early in calling basically rising interest rates were going to become a problem when we cut production relatively early in the cycle and took our lumps for it. So we were decisive there. I don't see a need to do that presently. I think that if it just gets noisy for a couple of quarters here, we're willing to kind of deal with that. I look at it from maybe a little bit of a longer-term perspective. We've done a lot of work in this portfolio in terms of -- which is reflected in the margins of the business over time. It's as good as I've ever seen it in terms of what our markets' exposures are, our competitive position, what we've done in terms of productivity. We're still spending CapEx this year. And over the next 90 days, barring a debacle, we're not going to take our foot off the gas because I think that we really built some leadership positions that we can monetize over the next 5 to 10 years. So we'd kind of -- despite all the angst, we'll kind of put our pedal to the metal here. Having said that, if you look at the individual pieces of our portfolio, these are medium-sized companies, right? These do not have long supply chains that you've got to make -- and these are not automotive factories where you have to make decisions 9 months in advance. We can toggle up and toggle down relatively quickly, and we've demonstrated that before, either going into COVID or coming out to COVID. If you look at our margin performance versus our peers, we outperformed. And it's not because we're geniuses, it's just because of the fact that it's easier to flex smaller enterprises than it is to flex big global enterprises. So if we have a couple of quarters where there's a lot of noise and people start pushing around orders a little bit, I mean, we're not going to panic here. I think that we're in a very healthy position. And if we've got to defend the equity because the equity markets overreact, then like I said, we have an insurance policy going into this year, and we'll take advantage of it.

Great. I think that's it. Rich, thanks a lot.

Great. Thanks, Steve.

Really appreciate it.