Dover Corporation (NYSE:DOV) Q1 2024 Earnings Call Transcript

Dover Corporation (NYSE:DOV) Q1 2024 Earnings Call Transcript April 25, 2024

Dover Corporation beats earnings expectations. Reported EPS is $1.95, expectations were $1.88. Dover Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Dover’s First Quarter 2024 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer; Brad Cerepak, Senior Vice President and Chief Financial Officer; and Jack Dickens, Senior Director, Investor Relations. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Jack Dickens. Please go ahead, sir.

Jack Dickens: Thank you, Natalie. Good morning, everyone and thank you for joining our call. An audio version of this call will be available on our website through May 16, and a replay link of the webcast will be archived for 90 days. Our comments today will include forward-looking statements based on current expectations. Actual results and events could differ from those statements due to a number of risks and uncertainties, which are discussed in our SEC filings. We assume no obligation to update our forward-looking statements. With that, I will turn this call over to Rich.

Richard Tobin: Thanks, Jack. Let’s go to Slide 3. First quarter results were in line with our expectations, strong performance across several of our end markets together with improving order and shipment trends in biopharma components and growth platforms, we’re able to offset the counter cyclicality in some of our long cycle portfolio in what was expected to be our toughest comparable quarter this year. It is clear that our operating posture that we took in the second half of 2023 to proactively curtail production has had its intended effect. Customer and channel inventories are now largely in balance with prevailing demand conditions and level set to normalize lead times. As a result, order momentum in the quarter was strong and broad based particularly in our shorter cycle end markets building off an exit rate from last and bolstering our confidence in our full year outlook.

We remain active on capital deployment. During the quarter, we closed two synergistic bolt-on acquisitions that add attractive digital and reoccurring revenue streams to our retail fueling and car wash platforms. The De-Sta-Co divestiture closed at the end of March as part of our ongoing portfolio evolution. We also launched a $500 million accelerated share repurchase program at the end of February to return excess capital to our shareholders. Our strong cash flow generation along with the proceeds from the De-Sta-Co sale provide ample capacity for further capital deployment in 2024. We’re off to a solid start to the year and the setup for the end of the year is encouraging. Our order rate momentum and healthy underlying demand conditions support the outlook for volume and margin improvement as we progress through the year.

We are narrowing our full year adjusted EPS guidance towards the higher end of the range and we’ll continue to evaluate our full year targets as the year progresses, especially if demand trends continue. Let’s go to Slide 4. Quarterly revenue was up 1% in the quarter, booking were up 3% organically year-over-year and up 12% sequentially in the quarter reflecting growing order rate moment across much of the portfolio. Of note, after seven quarters of bookings decline, as a result of the post-COVID backlogs, we have now seen positive bookings growth in two straight quarters and expect this positive trend to continue for the rest of the year. Segment margins were 19.7% down 30 basis points. We expect to return to positive year-over-year accretion from here on mix and volume leverage.

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Q&A Session

Adjusted EPS was up to $1.95 per share in the quarter and we are guiding 1% to 3% organic revenue growth and adjusted EPS of $9 to $9.15 for the year 2024. So let’s go move on to Slide 5. Engineered products had a robust quarter particularly strong volume growth and conversion waste handling which set an all-time record for first quarter profits and should continue its positive trajectory on strong truck body order momentum and software adoption. Aerospace and Defense also posted double-digit revenue growth. Volumes improved in vehicle aftermarket on better end market conditions and bookings growth including in Europe, we expect volumes to remain strong for the segment throughout 2024. Margin performance was solid in the quarter on strong volume conversion, price cost dynamics and productivity investments.

Clean energy and fueling returned to positive organic growth in the quarter after nine consecutive quarters of flat to negative top line performance driven by the end of the EV cycle in North America and channel destocking at what is our most heavy distribution exposed segment. Margins were down in the quarter on negative comparable mix, but we expect to see sequential improvement from here and target full year margins up over ’23 driven by attractive volume conversion and the benefits from previously enacted cost control measures. Imaging and identification posted a steady quarter with lower printer shipments in Europe and the U.S. largely offset by strong volumes in consumables and aftermarket. We expect top line to return to growth next quarter and to be up for the year.

Margin performance was exemplary on cost controls and higher mix of consumables and aftermarket shipments. Pumps & Process was up organically in the quarter on robust volumes in polymer processing and precision components. Order rates for thermal connectors were very encouraging. We are pleased to see biopharma shipments grow year-over-year with orders gaining further momentum with a book-to-bill of 1.08 as customer inventories continue to normalize and commercial drug production and new therapy development remain robust. I would like to point out that our biopharma business is nearly all consumable and in the post pandemic destocking headwinds dissipate. This is mostly driven by biopharma production volumes which are growing. Margins in the segment were down modestly due to strong volumes in polymer processing, which was slightly dilutive to the consolidated segment margin.

If order trends hold, we expect margins to be positive sequentially from here. Top line performance in climate and sustainability technologies was down as expected driven by the expected capital investment slowdown in beverage can making and the impact of destocking headwinds in the broader HVAC complex, most notably in European residential heat pumps on our brazed plate heat exchanger business. In contrast, our U.S. heat exchanger business continues to grow in double-digits on technology share gains and evolving end market applications including data centers. We expect top line to improve as the year progresses with easier comparable performance in the second half of the year and supported by strong volume in CO2 refrigeration systems which drove the bookings growth for the segment on several key customer build out wins.

I’ll pass it on to Brad.

Brad Cerepak : Thanks, Rich. Good morning, everyone. Let’s go to Slide 7. Top bridge shows our organic revenue decline of 1%. Acquisitions contributed 2% to the top line, while FX was essentially flat. The De-Sta-Co sale, which closed on March 31, will be an offset to acquisition revenue growth beginning in Q2. Total deal costs in the quarter were $3 million or $0.02 of EPS relating to the sale of De-Sta-Co and ongoing deal activity. From a geo perspective, the U.S., our largest market was up 1% in the quarter, while Europe and all of Asia were down 1% and 5%, respectively. China, which represents about half our revenue base in Asia, was up 5% organically in the quarter with improving conditions across several end markets. On the bottom chart, bookings were up year-over-year and sequentially on strong order momentum as a result of largely normalized channel inventories and lead times.

Our cash flow statement is on Slide 8. Free cash flow for the quarter came in at $122 million or 6% of revenue. Q1 comparable performance was impacted by investments in working capital due to the timing of shipments, driving higher receivable balances as well investment in inventory ahead of seasonally strong — stronger quarters in Q2 and Q3. The first quarter is traditionally our lowest cash flow quarter of the year. The change in accrued taxes was driven principally by the recording of future tax payments related to the De-Sta-Co divestiture. We plan to adjust these tax payments out of free cash flow reporting as they are non-operating in nature, in line with the exclusion of the gain on the sale of our adjusted P&L results. Our forecast for 2024 free cash flow remains on track between 13% and 15% of revenue.

I’ll turn it back to Rich.

Richard Tobin: Okay. Before we go to Q&A, I wanted to provide a little bit more color on some of the product lines that helped deliver our results in the last quarter and positioned us to continue growing in the high secular growth rate markets. Early on, we saw significant growth opportunity in each of these markets and proactively invested in CapEx and R&D to cultivate technological leadership and provide a sufficient foundation to win and scale with our customers. Across these markets, we enjoy leadership positions with strong brand recognition and well entrenched intellectual property protection. Each of these end markets have enjoyed double-digit growth trajectories over the past five years and the robust booking trends in the first quarter point to these markets remaining meaningful contributor to Dover’s overall revenue growth profile.

In total, these products deliver attractive margin conversion that is accretive to Dover’s consolidated margin. In CO2 systems, we are the early mover in transplanting natural refrigerant technology from Europe to the U.S., where we currently enjoy a technological lead and have the largest installed base in food, retail applications and the broadest product offering. We have proactively expanded our capacity and invested heavily behind a platform based product strategy supported by a differentiated digital go-to-market architecture that facilitates the sale and design process, reduces complexity, improves product quality and delivers best-in-class lead times and reduces the cost for ourselves and our customers. Our recently launched platforms are gaining traction in the marketplace with several exciting large scale CO2 conversion programs underway at key retailers with a multi-year runway.

We are also benefiting from our exposure to data centers and the secular growth in infrastructure investment with the significant power requirements of next generation chips that support artificial intelligence adoption are now requiring liquid cooling methods. We are exposed to liquid cooling of data centers in both our heat exchanger business, which enables heat transfer within the coolant distribution units and in the connector business which provides leak free liquid connection points at the server racks and manifolds and now directly to the individual chip cooling cold plates. I’ll leave the data center infrastructure market forecast to our end customers further down the chain. For us, it’s clearly an area of robust growth in the foreseeable future as evidenced by our recent order trajectory and high profile specification wins with the chip OEMs. Importantly, we have proactively installed production capacity and are well positioned to meet any meaningful inflections in demand with industry best lead times.

The through-cycle performance of our biopharma components platform has been solid despite the well-chronicled post-COVID destocking headwinds over the past two years. With customer inventory levels now normalizing the long-term tailwinds for single use bioprocessing and cell and gene therapies are compelling and importantly our products are specified for a regulated manufacturing environment. While our business is still below peak levels, we believe the recent booking trends and positive tone from our customers and industry partners set up for a potential upside this year. Finally, let’s go to Slide 10 shows the long-term performance of our portfolio. Our playbook for earnings accretion remains unchanged to deliver growth through a combination of top line organic growth, earnings accretion through operational execution and returns of productive capital deployment strategy.

We are pleased with the start of the year. With our flexible business model, we will continue to monitor end market conditions and can quickly respond to changes in the marketplace. And Jack, let’s go to Q&A.

Operator: [Operator Instructions] We will now hear from Mike Halloran with Baird.

Mike Halloran: So a couple of questions here. First on orders, obviously comps are easing in the next couple of quarters, but maybe just talk a little bit about the underlying perspective from an end market that gets you comfortable with the order commentary for the year, just kind of the confidence in the composition of where that order growth is going to come from, from an underlying market perspective? And then related, do you see orders up sequentially going into the second quarter?

Richard Tobin: Yes, I do. Look, we’d have to go segment by segment because they’re different between the short cycle and the longer cycle portions of the portfolio, but orders are up broad based with the exception of the two that we highlighted both in can making and in heat exchangers in Europe. We’d expect that trend to continue, which supports basically the seasonality where we expect some pretty big step up in performance in Q2 and Q3 and we’ll see about Q4, which will be a dynamic of how the order rates go between now and then. I think most importantly our confidence is based on the fact that all the hard work we did in terms of managing inventory through the channel last year and that’s allowed to us to have more confidence in terms of the order rates going forward.

Mike Halloran: Can you just talk about the actionability of the M&A pipeline from your perspective? Obviously, the commentary has been pretty positive about your flexibility in the short-term here. How would you look at that channel as you’re sitting here today and the priorities?

Richard Tobin: It’s loosened for sure. I think there’s a recognition now that interest rates are here to stay. That’s helpful. I think that the equity markets have rallied quite a bit. And so I think that this fear of purchase compression on multiples has gone away, but it’s not a flood yet. But I think that the activity in terms of opportunities that we can look at is a lot better than it would have been a year ago today.

Operator: And our next question comes from Steve Tusa with JPMorgan.

Steve Tusa: Just on the orders comment, I guess, you said SWEP really isn’t picking up. Is that a bit of a reflection of kind of the EU heat pump market? That’s not really you would expect to see it by now if you were if things were turning up there in the second half? I think you’ve said that before.

Richard Tobin: Yes. I mean we’re running out of time here. So our expectation that that market will be clearly down year-over-year. I think that we’ve got, we’ve brought down even our internal estimates for this year. So I think that’s probably the one business that is not tracking to what we thought it would have been, maybe we’re a little optimistic but we’ll see. So we would have to see orders bounce back at the end of Q2 to support any kind of inflection in the marketplace in the second half.

Steve Tusa: Right. So like a solid double-digit first half to second half like the way you see orders today that doesn’t sound right?

Richard Tobin: Yes. I mean I have to go back and look at the comps, but if you remember.

Steve Tusa: I meant sequential.

Richard Tobin: Yes. Sequentially, yes.

Steve Tusa: You don’t see that as being that’s not embedded in your current forecast now given you aren’t seeing the orders?

Richard Tobin: That’s right.

Steve Tusa: Okay. And then just could you help calibrate us just on an EPS basis for the second quarter? Or have you want to talk about it? I mean it looks like the orders are running right now ahead of the sales forecast that are out there, your orders are going to be up sequentially. So I mean like you look like you’re covered from an orders perspective. Any further color on the seasonality of EPS for 2Q? Anything that influences margins in a major way or anything like that because the sales look like they’re going to be okay relative to consensus?