Richard Tobin: Well, it’s been volatile only because of the amount of demand that it was there. And to meet that demand, you had to basically an expansion of everybody’s balance sheet from an inventory point of view. I think that when we put out the guidance for this year, we basically said now that we’re in a more normalized market that we were going to bring inventories down. I think we’re making really good progress on raw materials. I think by cutting production in Q4, we should clear WIP and finished goods, then it’s all about receivables from here to the end of the year.
Julian Mitchell: I see. And so receivables was kind of the main delta on the change in the free cash margin guide?
Brad Cerepak: Well, it’s part of it. But as we went – if you go back and look at what our commentary has been over the course of the year, we’ve indicated it’s tough to bring inventories down, but we did that in Q3. We see that continuing into Q4. As we look back, and the actual good performance in Q3, receivables, given the timing of sales, actually built in the quarter a bit. So that liquidation is due to come here in the fourth quarter. And I think we’ll see very robust cash flow again, based on the commentary that we already provided that fourth quarter is always seasonally strong. But I think given the actions we’re taking, it will be even more robust in line with our guide.
Richard Tobin: Yes. Between cash flow and the proceeds of the disposal, which we’ll receive in Q1, we’re in a very healthy cash position.
Julian Mitchell: That makes sense. Thank you. And maybe just to follow-up on the question around the sort of the sales outlook. So I think it’s very clear and the right thing to do that you’re sort of under selling into the channel, if you like, short-term, to make sure channel partners have low inventories entering the new year. When you sort of take that comment plus the improvement in some orders figures you’ve seen recently, does that make you sort of confident around the revenue growth outlook despite what the backlog has done? And so we should sort of take the low inventories in the channel plus the orders movement, that’s a better determinant of sort of sales into early next year than perhaps what the backlog has been doing recently?
Richard Tobin: Yes. I mean at the end of the day, everything that’s in our control – for 2024, I think that we’re taking the right move. So we discussed managing channel, right, from an inventory point of view. The reason that we highlighted some of the investments, we think that those are growth vectors that those businesses are going to grow despite the macro, right, that they’re not subject to kind of general sentiment at the end of the day, or interest rates or anything else just because they’ve got a demand there. So yes, I mean, look, we’re – knock wood, we’re feeling positive about our setup going into 2024 based on how we’ve managed and will continue to manage 2023.
Julian Mitchell: That’s helpful. Thank you.
Richard Tobin: Thanks.
Operator: The next question comes from Deane Dray with RBC Capital Markets. Please go ahead.
Deane Dray: Thank you. Good morning, everyone.
Richard Tobin: Good morning, Dan.
Deane Dray: Hey. I was hoping to get some color on the retail fueling. It just sounds like there was a bit of a disconnect between below-ground and above-ground, below-ground, seem to be fueling effects of higher rates and maybe some destock, but you weren’t seeing that above the ground. But just can you square those, please?
Richard Tobin: Sure. We had – in 2022, we had a great year in below-ground and a bad year in above-ground. So if you think about kind of the time it takes to build sites or refurbishment sites, you had kind of capacity that got built and then they finished the job on the top this year. Belowground now is in a bit of a headwind because of the fact that if you think about like a retailer, a retailer is going to spec in the product that they want at a fueling site and then going to go contract the installation. And part of the problem is it’s no longer labor anymore, and it’s no a longer product availability. It’s the fact that those contractors need working capital loans in order to do these projects and the cost of those loans now is probably quintupled over the last year or so.
It was very nice for everybody would be talking about 5%. 5% is a baseline. You’re a contractor, you need a working capital loan, you’re paying nine or 10. And so that is putting a little bit of a drag in terms of getting that work done, number one. And number two, just a general comment, as I gave the example before, a lot of that underground business, at least the recurring revenue portion of it is sold through distribution, the carrying cost of that inventory has gone up quite a bit, and you basically see almost an over liquidation of inventory in the chain because they know that our lead times are down low, so they’re taking their inventory down because they don’t want to pay the carrying cost. At some point, that’s got to give, and we’re not incentivizing through price or terms to push that inventory back into the system.
We’ll deal with that on the come when we get into 2024.
Deane Dray: All right. That’s really helpful. And then just a follow-up on the geographies. What were the surprises and maybe you’re seeing some of the macro begin to be felt on the U.S. side was down 7%. But what surprised you there?
Richard Tobin: I think it’s more and more – look, no one came into this year thinking that Europe was going to be robust. It hasn’t been. I think that CO2 systems and heat exchangers are running counter to that argument. CO2 is actually performing quite well. The heat exchanger issue, like I said, up until 45 days ago, you couldn’t make enough of them to supply heat pump demand and that just came to quite a halt here I think in a recognition that there’s too much inventory in the chain. We were not very hopeful about China, and China has been poor. And I think in the U.S., it’s just the general – what I just answered, I gave you the example a second ago. In the U.S., you can’t raise rates at the rate we’re doing and not to have knock-on effects in terms of the carrying cost and that’s what we’re seeing now.
Deane Dray: Thank you.
Operator: Our final question comes from Nigel Coe with Wolfe Research. Please go ahead.
Nigel Coe: Thanks, guys. Thanks for fitting me in. So going back to the non-core kind of the portfolio review, I mean, obviously, there’s a parlor game about trying to guess which assets might not meet the cuts going forward. But De-Sta-Co wasn’t one of those assets. I think already seen as potentially non-core. So I’m just curious given the decent growth, obviously, very good margins, what was it that led that asset to being sold?
Richard Tobin: I think that the growth was okay, at least in my tenure here. The end market exposure, both from – the end market exposure and the geographical exposure, we did not find attractive.
Nigel Coe: Too much Europe I assume?
Richard Tobin: Too much auto and too much Asia.
Nigel Coe: Okay. Too much Asia.
Brad Cerepak: Too much China, yes.
Nigel Coe: Okay. And then just on buybacks, you did an ASR last year. You’ve got a fair amount of financing flexibility if you get your free cash flow forecast with the sale as well. I mean, any thoughts on buybacks at these levels?
Richard Tobin: Yes. I mean, look, buying back our stock at these levels has become very attractive. I think that we’ve got a lot of moving parts right here in terms of delivering on the fourth quarter and the cash flow. And then we’ve got an outbound on the acquisition and an inbound on the disposal. After all that is settled, we’ll clearly be in a very healthy balance sheet position. And I’m sure that capital return discussion will come to the forefront.
Nigel Coe: Okay. I leave it there. Thanks, guys.
Richard Tobin: Thanks.
Operator: Thank you. That concludes our question-and-answer period and Dover’s third quarter 2023 earnings conference call. You may disconnect your line at this time, and have a wonderful day.
