Dover Corporation ($DOV)

All right. There he is. We have Rich Tobin, CEO of Dover, who is zooming in because of flight complication. So really appreciate the pivot. And Rich, thanks for attending virtually. We appreciate it.

No problem, Steve.

I'll be working the presentation. So I'll make myself useful, but...

Yes. I mean the presentation is only there. If anybody has any questions about full year results last year guidance. So I'm not going to go through it. So if you want to put the guidance slide up, just to stick it up there. It's probably the most salient one and we can go to Q&A.

That one?

I can't see them. So all.

Okay. That's the guidance. And there's no -- we'll have to see if there's no changes. I think we're...

There's no changes, no.

I think we're good.

Yes.

So maybe just as a start, you're always pretty good at giving us a bit of an update on what's going on in the macro and orders and things like that. What are you guys seeing here since the last time we spoke?

Nothing really. I mean, I think it's a little bit early. I mean, clearly, we're preparing for higher energy costs. And for us, that's more freight cost than anything else, which I don't think is a hurdle that's going to be that difficult. But in terms of our customer behavior, we've seen nothing so far. Maybe a little bit of rerouting of freight. Does that cause any supply chain issues, I don't believe so, but right now, we don't see anything.

And how is the -- I think you guys were somewhat bullish in January as far as how the orders were trending coming out of a pretty strong 4Q. What are you guys seeing on the orders front so far through the last turn of the cards, maybe February?

Yes. I mean orders are tracking great. So strong January, strong February. We're clocking through March. So we should come out at the end of Q1 from a book-to-bill point of view in really good shape for the setup for Q2 and Q3.

Can you maybe opine on what great means with more mathematics?

That's higher than 1, Steve, clearly higher than 1.

So I think seasonally, it has to be higher than 1, right, because you have a step-up from 1Q to 2Q. So I know last year was in kind of the 1.08, 1.07 range. Is that -- can it be a little bit better than that?

It can be better than that.

Okay. And I think you had said that on the last -- on the conference call that you were kind of watching these orders. And if you guys built a little bit of backlog and had a nice trend into 2Q that you would reevaluate the year to a degree. Is there enough going on in the world that with this uncertainty that you would say, all right, things are trending better, but probably not prudent given what's going on? Or is there enough visibility to maybe change the guide?

Hard to say. I mean, I'd like to close Q1 and see where we are in orders. I mean, clearly, when we do close Q1, we'll have a significant portion of Q2 booked and probably booking into Q3 in certain of the business lines, whether that will be enough for us to revisit the guidance or not. I doubt it. I think we'd probably take another quarter or so because I know you and I have go back and forth about organic versus all-in growth. I mean, FX is going to be a big thing going from here. So we have a really good comp in FX in Q1, but that is fading now with the strength of the dollar. So with all that going on, look, I think that if we close, we're concentrating in getting product out the door as quick as we can. So will we change guidance at the end of Q1? I doubt it, but I think we'll give a lot of color on where we are in terms of backlog by business for sure.

Right. As far as these orders, I know last -- second half of last year, there was a bit of a push. How much of this is catch-up from that? And how much do you think is real demand?

Yes. I mean I think what we talked about last year was in retail refrigeration. That cost us about 2 points of organic growth last year that had pushed right. You saw that the orders inflected very positively in Q4. So -- but our customer base can't absorb more volume, right? Because these are big installs or shutting stores down. So it's not as if we're going to pick up the lost volume for last year and add it to this year. It's just basically going to come out at the pace that we would have liked to have seen last year because we got to time it for installs and everything else. So you'll see it demonstrably in the backlog for sure, but it will be an odd year where bookings, which is usually a short-cycle business, bookings will be in backlog for in excess of a quarter in that particular business. And coupled with that, we started and launched our CO2 platform about 18, 20 months ago. I mean that's tracking to be a $300 million business. So it's not -- we've resized the retail refrigeration to base business, will probably be sold out in that business. The real top end growth that we'll see is in CO2.

Right. So that's a pretty strong rate. So that should be comfortably above kind of the company organic average for this year?

Yes, it's going to be a big piece to driving the top line in 2026 for sure.

And then you also mentioned clean energy and fueling as being an above-average grower. What are you guys seeing there, the various moving parts there?

Yes. I mean the fueling solutions, so the traditional business, which is retail gas station equipment has inflected positively in the back half of last year for the first time in probably 4 years now that we've got by the EVs are taking over the world cycle. We think that, that because of the underinvestment that we've seen in the previous 3 or 4 years, plus the fact that there's a lot of CapEx going into that space because profit margins in retail fueling have expanded significantly over that time period that, again, we think that, that's probably a 3-year cycle only because kind of like what I mentioned in refrigeration, there's only so much equipment that can be absorbed by the marketplace because you're doing big installs and you have to time it out and everything. So -- and we like it that way. We'd rather have it over kind of a steady 3-year grower as opposed to kind of getting it all in 12 months. So we feel really good about that side of the business. The other side of the business, which is the cryogenic components grew very well last year. We expect that to do the same again this year. That's more of a margin story now because that's where we're doing a lot of the footprint consolidation, and that is where a material portion of the $40 million rollover of productivity is going to end up. So we like that segment just because of the dynamics of the top line, but what we're really concentrating is getting that segment to 25% EBITDA margin.

So the Fueling Solutions, the kind of core ICE business, I think that makes a lot of sense is a bit of a recovery from deferred CapEx there. The growth drivers for the other business, kind of the CNG, I guess, a little bit of LNG in there, what's driving that business? And is there anything that stands out there that can sustain a high level of growth?

Well, I mean, it's just the general infrastructure build-out of the gas complex itself. So it's CNG, LNG, propane, everything. So we're levered towards gas, not only in this particular segment, but in Pumps & Process Solutions also. That's why we invest in it because we think that, that is durable for a decade minimum. So that's what's driving that.

Yes. Is there some sort of space exposure in there or something I've been hearing.

There is.

That I haven't really talked about.

Yes, right? Data centers and space, maybe we'll put that on the cover of our presentation. Yes, there is. Because the fuel that goes into a space launch is cryogenic fuel. So we're a SIKORA material supplier into that space.

And I mean, could that be another growth driver? Or is it just too small?

Yes. Yes. No, it's growing quite nicely. It's not the biggest business in the world before we get all hyped up about it, but it is going to be relatively material exit this year for sure.

So DCF seems like it could also be nicely above the organic average.

Yes. I mean the 2 segments that we talked about are right now, as we sit here, probably going to be the biggest contributors to the top line and in absolute profit for '26 over '25.

And how much runway on the -- just stepping back to retail refrigeration, sorry, but -- how much runway do you have on CO2? I mean is that -- that's a $300 million business now? Can that continue to grow like solid double digits? I know you had a big order there a year ago or so?

Yes. I mean we hope so. I mean adoption rates are accelerating. I mean we -- I don't want to get into the whole mandate versus non-mandate. I think at the end of the day, the technology has now been proven. It's got a higher first-in capital cost, but over time, it pays for itself over the traditional solutions, and that's known now. The other issue, the hurdle was training all the techs to service CO2. We spent an enormous amount of money and time doing that over the last couple of years. And so that hurdle has now been crossed. So I don't think anybody is waiting around anymore for different states to legislate it. It's more if you're a big national grocery chain, you're moving to CO2. So the runway should be significant.

And then the other parts of, I guess, of this business, on the heat pump side, Europe seems to have some signs of life, but the U.S. really seems to be inflecting now for you guys there. The AHR Expo, your business leader there was much more positive. It seems like that one is turning the corner, SWEP?

You've got the Swedes to be positive. That's good.

Jumping out of the...

Look, heat pumps are up in double digits right now, but it's coming off of a low base. And the size of that business is more or less half of what it was at its peak in terms of demand. So your guess is as good as mine as how that tracks from here and where it ends up. What's really driving the top line of the business is the data center side, which is up about 100% from where it was. I think that we were early in terms of the build-out of the capacity. It's largely a duopoly that we participate in. So we pretty much can sell everything that we can make at this point.

And then just lastly on Belvac. Any signs of life on the can equipment side of...

No, Belvac is not going to shrink, but we don't expect a lot of growth CapEx cycle when it comes, everybody will kick it off simultaneously. But right now, it's relatively light.

Okay. Just moving to the other businesses. What's -- in the Engineered Products side, I know it's kind of small now, vehicle service...

Vehicle services is doing okay. I mean it did a fantastic job in terms of margin despite having a down year in terms of top line, which is largely due to Europe because that's got a pretty material exposure to Europe and Europe right now for anything around the automotive complex even in service is tough. The military business should do very well this year for all the reasons we can understand. So this segment should post some decent top line growth because of the fact that the -- that MPG should do relatively well.

So that -- that's kind of a company average organic for DEP?

Probably lower now that the average is 4% to 6% is in the guidance. I told you that the 2 are probably going to be at the top end there. So it'll probably be at the lower end if we can squeeze it. Again, that one has got FX in it. So we have to be careful about what our assumptions are from there. But -- and TWG and the winches is up because what we believe is happening on the pipeline side. We've got material exposure there to the pipeline layer business, and that is growing for the first time in half a decade.

Sorry, the 4% to 6% is that that's organic or that's all in?

That's organic.

Okay. I think you said 3% to 5% in the...

Okay. All right.

Okay. Sorry. I know you don't care about organic growth.

We're all-in growth and all-in absolute profit, but anyway, go ahead.

Yes. On DII, the portfolio there, I mean, things have been a little bit slower than they've been in the past. Obviously, you have the textile business that's been tough, but any signs of life on that front or just pretty steady as she goes, low single-digit type growth?

Yes. I mean, did a fabulous job in the margin. We have been lapping that decline in the textile business that is 1/4 of the size that it was at its peak. That's largely -- we've lapped that now. We would expect that business to grow 3% to 4% depending on FX.

So kind of the low end of the organic range.

Yes.

What do you need to see that pick up? And how much of a drag was textile, like a point or 2 or...

I'd have to go back and look for '25, to be honest with you, Steve. I don't know what it would have been last year, probably 1 point at maximum. Look, that business just got the way it grows. If you want to goose the numbers, you'd have to have build-out in consumer goods, basically new plants and new lines, and that generally doesn't happen too much. And then you could do it through pricing at the end of the day. How long you could get away with that remains to be seen. I think that we basically take about 1.5 points of price every year and the balance and what you see intra-year about the movement, if we take FX out of it is when you have printer sales, volume goes up, then margin comes down a little bit. And when you have a bigger mix towards consumables, then volume is lower, but your margin goes up. And that's the way it's been for as long as I've run the company.

Right. But there's no real uptick in equipment sales because food and beverage, consumer good CapEx is kind of stable. So that's kind of what...

Yes. Yes. I mean at the end of the day, it's all volume, and we're levered towards consumer goods, a lot of which is food. So it generally just kind of runs.

Okay. On the pumps and process business, maybe like a bit of a swing factor here. What are the -- what's the outlook for the kind of different parts of this segment?

Had a great year last year. So it was clearly the biggest contributor to the top line and absolute profit and profit margin. So we had the return of biopharma, which was great. That has held in and continues to hold in. So the comps -- you're coming off a low base, so the comps are going to look a little bit funny this year, but in terms of just the absolute growth rate and the absolute contribution of profit, that looks in good shape. Industrial right now is up, but it's up -- it's slow right now. We'll see what happens with that over the balance of the year. Precision Components is doing really well. So kind of mid-single digits grower last year. Expect that the same this year. That's compressor and turbine component part demand. That has Maag in it. Maag was slow last year. Maag is going to be flat this year. SIKORA continues to do well. So that's kind of what basically masked the decline in Maag last year was the outperformance of SIKORA last year. So the acquisition was well timed. Back to DPC, that's the area where we think we've got the opportunity to inflect positive in the back half of the year. We've been doing really well on the turbine side. So we supply the who's who's making these gas turbines.

These are the compressor component compression in that business?

No, these are the Vernova and the Siemens of the world and everybody else on the gas turbines. What we haven't seen is on the compression side, and that's the part that's more levered towards the distribution of gas, which is on pipeline build-out. And what we've seen from the MLPs in terms of CapEx, it's moving up quite a bit. So you've got to deliver gas to all these turbines that are being installed. So we don't have it right now in our forecast, but we're we believe that we should see a material inflection in terms of demand in the back half of this year as that investment catches up.

So you effectively have kind of Maag stabilized. So that's not growing, but it's not getting worse. You've got the data center stuff continuing to grow pretty strong here. And then you've got this inflection on the compression side going along with power gen. I would think DPPS could be an above average -- above segment -- above company average grower there. Is SIKORA growing above the company average?

Well above-ish.

When does that go organic third quarter, fourth quarter?

June, you have to ask Jack. I think it's June.

Okay. So that should -- I mean, that should be an accelerator into the second half of the year for the segment?

Yes. Look, whether it's acquired growth or organic growth, it doesn't matter to me. But yes, it's -- yes, I mean it's adding -- I think it was adding an exit a couple of points to top line growth. M&A was last year and probably will until we lap it in June.

Right. But then SIKORA comes in and it's accretive to growth at that stage of the game, organic growth. So...

Yes. Yes.

Yes. So I don't really see a lot in these businesses that's like -- there's a decent amount that could be above the high end of the range and not too many that are going to be below the low end of the range on an organic basis. And second half should be pretty good as an exit rate into next year. Is that the right construct if we're going to get a little bullish here?

Yes. Look, at the end of the day, it's going to be orders, right? And so we're pretty close to having exit, which we covered in terms of what we think book-to-bill is going to look like at the end of Q1. How that builds and ramps through Q2? You know how we do this at the end of the day. It's -- we build a lot of capacity, so we don't generate a lot of cash in Q1 as we ramp up production. We sell it in Q2 and Q3. And then depending on the order book, we'll make decisions about what we're going to do into Q4. But right now, structural growth across the portfolio looks pretty good. There's a variety of reasons behind it just because of the complexity of it. But yes, but it's not as if we're pointing to the piece of the portfolio and say that's going to be a problem. Invariably, somebody is going to overperform and somebody is going to underperform. But on average, we feel good about what we put out there for organic growth which benchmarks very well versus our peer set in terms of EPS growth, where I think we're probably top quartile.

So from a margin perspective, you mentioned DCEF, you talked about 25% EBITDA. I think at DPPS, it's always kind of that 30% marker. That should be pretty stable. Maag not growing very much is probably neutral from a mix perspective. So that business should continue to do pretty well, right? No risk on margins in DPPS?

Yes, I wouldn't worry. I mean I think we exited above 30%. I think at certain points last year, we're at 29% and change. It's all mix affected at the end of the day. 30% on average is probably a good number...

But Maag really seems to be the downside over.

Yes, Maag would be, but DPC coming in, DPC is probably in the mid-20s. And if that inflects positively, it may have a little bit of -- bring it down a little bit, but we're not talking bringing it down materially.

Okay. And then you're stable at DII, I would assume DEP...

Stable at DII, DEP...

DEP for margins?

Our margins were up on down revenue last year. I think we've got to be careful there. I think if we can hold margins there and grow the top line, I think we'd be in good shape. Where we're looking for the margin is in clean energy. I think we discussed because that's got some of the roll-forward benefit and it's got volume leverage, which we should start seeing as we ramp. And we'll see what we can -- SWEP should ramp in terms of margin. And let's see what we get out of Refrigeration. I mean God is my witness we're going to get to 20%.

20% is possible?

Yes, 20% is possible?

20% EBITDA possible in...

[ 20% ] EBIT possible. We've done EBITDA. We've done EBIT in quarters. It's possible to get that business to 20%.

In like 18 months this year, 2 years? Is that got a long.

Next year, if everything holds in.

Okay. That's pretty good.

Yes.

So when we think about the leverage this year, you're guiding to what you're guiding to with the cost savings from restructuring, your incremental on this growth seems relatively modest. Should we think about it that way? It sounds like there's enough positive drivers that with the restructuring that the incremental this year should be decently above trend.

We're going to finish talking up the revenue now to talk up the incremental margin on top of that. All right. Look...

I believe you said Miami at a competitor -- I don't know what competitor conference down there.

I don't go any competitor conferences, Steve, just yours. 35% is the number we can hold, right? And that gives me a little bit of room in terms of mix and assumes that every year, we've got roll forward restructuring savings, which I think that we should have next year again. So yes, I mean, 25%, as I commented before publicly, I think 25% is not realistic anymore. I think that 35% is pretty much the target. Now we did well over that last year just because we had significant tailwind on mix and restructuring, but 35% is still a good number in terms of incremental.

Okay. Anything on the recent move in raw materials that we have to be aware of? And I think you guys guided to 1.5% to 2% of price with the inflation. Should we think about that trending more towards 2%.

Yes, look, we're futzing around with copper, and copper is kind of all hung up with the macro right now. I think that we're well positioned on steel and stainless steel. But on copper, I think we've got enough pricing power over time, we can deal with that.

Okay. And the 1.5% to 2%, should that be more like 2% given this incremental inflation?

I don't know, right? Because we just got -- I mean, between the business mix and the mix within the businesses, I think that 1.5% to 2% is probably a solid number. I don't want to talk that up.

Okay. Any questions on the business fundamentals out there that anyone has? I mean it seems to. Here we go. Go ahead. Just say it, I'll talk about it.

[indiscernible].

Well, I mean, I heard the question.

Okay. Great.

Yes. I mean, look, we could -- you could drill yourself in a hole here if you really wanted to. All I can do is react to what we see from the data and the conversations with our customers. Frankly, it looks like if it gets worse, it's more of an issue for Europe than it is for North America and our waiting in terms of of business mix and where we see the growth coming this year naturally just because the GDP alone is more North America focused. I think that we tend to kind of forget that the changes in the tax law on bonus depreciation took a while to kind of work its way through the system, but there is a pretty good incentive out there for doing CapEx right now. Higher energy pricing globally, does that spur additional CapEx into the energy complex this year? Look, that's not for Dover to answer. That's more for the energy guys to answer, but -- and that generally has a long tail. So look, could some shoot drop? Sure, it could. But you know what, we made it through COVID and we made it through tariff tantrum and we made it -- I mean, if you go back and look at our performance during those periods, we tend to do well. And you know what? And if it gets bad for whatever reason, our balance sheet is better than anybody. So a dislocation in the market, we can take advantage of either from a capital return point of view or from an M&A point of view. So I'm not -- I can't prognosticate about something that may happen. I can only just go by the data on the ground that we see.

And you guys certainly aren't the most global company I cover. So the Middle East exposure, obviously, directly is probably pretty good.

Yes, it's manageable.

Yes, yes. That's a good segue to the balance sheet. You guys have -- are kind of -- every year, you seem to have a big war chest. You're adding here and there, but you're also buying back a decent amount of stock. How would you -- what would you place the odds on today between M&A as we move through the year, M&A and buyback as we're getting towards the midpoint of the year?

Yes. I mean the biggest mistake I made last year was buying $0.5 billion, I should have bought $1 billion, I mean, in retrospect. But at the time, we were looking at the M&A pipeline and kind of keeping our powder dry. So we move into this year, I think what I said during the conference call, the full year based on transaction multiples that we were probably biased towards capital return in '26 more than usual. So it's usually a 70-30 split, so 70% biased towards M&A and 30% towards capital return. In late January, I think that we said our bias was 50-50. I think that's fair to say it's the same right now. The bad news is, again, that multiples are high. The good news is that because multiples are high, there are a lot more assets coming to market because everybody sees the multiples they're trading at. So your guess is as good as mine as were multiples high because of the paucity of assets and multiples come down when more assets come. Hard to say. I guess we'll see. But I guess the good news is more assets are coming. So there's more opportunities to kick the tires on things that come. Generally speaking, I'd say that more than half of the M&A that we do is not assets brought to market that we get them ourselves. So we do have some opportunities that we've been working on in that regard. And we're looking at kind of some of the assets that are largely coming out of PE, we're looking at them. So we'll see what the prevailing multiples are for those assets when they come.

Are you wed to deals that bolt on to the current platforms? Or are there opportunities we had Dave Cody here yesterday from GP, GI, and their whole business model is basically providing kind of a permanent capital home for some of these businesses that are coming out of private equity and maybe the private equity guys feel a little bit more of an urgency to sell these days. Are you seeing some assets come out that would be attractive, not necessarily within one of your platforms today that you would move on as a new platform if the price was right?

Yes. I mean if it's not an adjacency, then it's very hard -- execution -- it's easy to spend the money. Execution risk is real, right? You need to know how to run the businesses. And I don't want to get on a soapbox of -- we went through this whole period of every industrial company becoming a software company as if you can just know how to run software companies. I mean I think that was a pretty far punt forget valuations at the time. So near adjacencies we'll look at. SIKORA, we don't -- we're not in test and inspection in any meaningful way. But because it was an adjacency to a position that we had where we knew the customer base, then we said this is a move that we can make. It's the same thing when we got into cryogenic components. We knew the end customer. So we had kind of a right to play and a lot of that is through distribution, and we know how to run distribution businesses. So there's checkmarks. So we're not an asset collector. We see things from time to time that kind of be nice to have because you think you can turn them around, but I don't know. I don't think anybody wants to see our portfolio get more complex than it is. One would argue that it trades at a discount because of the complexity of the portfolio that we haven't been able to overcome. So I don't think we'd go the other way and make it more complex at this point.

Right. I think that makes sense. And are you seeing -- just as a follow-up, are you seeing a bit more urgency from private equity? Or are they still.

I said what I said before. I mean, look, I've been hearing private equity has got to monetize for 4 years now. But interest rates are heading the right way and multiples are heading the right way. So if you're not going to bring it now, when are you going to bring it?

Right, right. The last question I have is on this buyback. Have you thought about doing it in a more programmatic way because you tend to be unique in that you kind of like get to the end of the year, and then it's like a $500 million sudden ASR that you've done. Have you thought about maybe a little more programmatic? you just like having that optionality?

Yes. I mean we've thought about it for sure. I mean programmatic becomes a little bit funny because then everybody just models it in that you're going to do it every year. And then you do some M&A and you don't and then you kind of get all twisted up and it takes away the opportunistic nature of if you think that your equity is dislocated from a valuation point of view that you can act meaningfully as opposed to averaging it over time. So yes, I mean, we discuss it every year about kind of what the stance is going to be. I think that -- I think we've proven when we've acted meaningfully, I think we're 100% in the money.

Okay. Well, I think as an editorial, you could at least raise the low end of the range by like a nickel. I think that would be differentiated when you guys report. So...

Thanks for that. I'll keep that in mind, Steve.

Everybody feels the same way in the room, too, just like...

Yes. I'm shocked.

If you could feel the energy here, you'd be blown away.

Well, you only get rewarded for beating and raising now. I mean that's the new mantra like give out terrible guidance and then just knock it up every quarter. But not us, we give you what we think. We'll see when we get to the end of the quarter though, depending on order rates.

We could talk for about 3 hours on this.

Yes. I'm sure, we could.

But we're out of time. Rich, thanks for making the effort on Zoom. We appreciate it.

Yes. Sorry for not being there, Steve.

No, understand.

See you soon.

See you.

All right. Bye.