Dover Corporation (NYSE:DOV) Q4 2023 Earnings Call Transcript

Dover Corporation (NYSE:DOV) Q4 2023 Earnings Call Transcript February 1, 2024

Dover Corporation reports earnings inline with expectations. Reported EPS is $2.45 EPS, expectations were $2.45. DOV 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 Fourth Quarter and Full Year 2023 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, Angela. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through February 22, 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 start with the key messages on Slide 3. Market demand conditions in the fourth quarter played out largely as we expected. And as we discussed at the end of Q3, we adopted a business posture focused on managing down production in certain product lines to balance channel inventories to the detriment of fixed cost absorption. This puts us in a good inventory position and enable us to match demand and production in 2024. This operating posture also drove solid operating free cash flow performance in the quarter, which positions us to play offense on the capital deployment front in 2024. We capitalized on strong volumes in several markets and drove margin mix higher for the consolidated portfolio in the quarter.

The breadth and diversity of our end market exposures, along with proactive cost containment and pricing discipline led to another record high quarterly segment margin in Q4. We remained active on the portfolio front. We improved our portfolio through synergistic bolt-on acquisitions, including two transactions announced in January that add attractive reoccurring and software revenue streams with good growth exposures to our mix. We expect to close the DESTACO sale by the end of the first quarter, which will further enhance our cash position. We entered 2024 in a significantly better financial position than we were 12 months ago. Underlying demand across the majority of the portfolio is solid. Bookings momentum is improving, and we drove the first organic bookings growth in eight quarters.

Of note, biopharma book-to-bill was above one, signifying an improving sentiment in the market which is also evident in the recently announced results of some customers and channel partners. While we expect seasonality in idiosyncratic headwinds such as European heat pumps and can-making equipment to weigh on volumes in the first half. Overall, we expect demand conditions to progressively improve off the fourth quarter exit rate through the year. Our recent investments puts us in a very strong position to capture secular growth across numerous end markets like CO2 refrigeration, bioprocessing, data center cooling, electricification of heating and cooling and smart compressor controls. In-flight cost actions provide carryover benefits in 2024 with specific projects to be announced during the year.

Lastly, our balance sheet has ample capacity to execute against a strong acquisition pipeline and pursue opportunistic capital return strategies as we continue to upgrade the portfolio over time. Let’s go to Slide 4. Consolidated organic revenue was down 3% in the quarter. Bookings were up 2% organically, reflecting growing order rate momentum across much of the portfolio. Segment margin was up 100 basis points to 22% on broad-based productivity and port portfolio improvements. Free cash flow in the quarter was over $450 million or 22% of revenue on improved working capital efficiency and lower CapEx. Adjusted EPS was up 13% to $2.45 per share in the quarter. Our guide for 2024 reflects a constructive outlook. We are guiding for organic revenue growth of 1% to 3% and adjusted EPS of $8.95 to $9.15 [ph] per share, which represents a 5% to 7% year-over-year organic growth, excluding the tax reorganization benefit recognized in the fourth.

Let’s skip to Slide 5. Engineered Products had a solid quarter driven particularly strong volume growth in conversion and waste handling. Chassis availability improved in the quarter and the business has reservations from large national waste haulers and municipalities well into 2024. Europe and Asia shipments were notably lower in vehicle aftermarket, but bookings improved during the quarter. Margin performance improved 270 basis points on positive mix benefits and volume conversion on recent productivity investments in the waste-hauling business, coupled with a solid performance in Aerospace and Defense. Clean Energy and fueling is our most distribution leverage segment, and as such, is where we intervened aggressively on production to facilitate general channel destocking in below-ground retail fueling, hanging hardware, LPG components and car wash in the quarter.

Cryogenic components continued their robust growth and above-ground fueling equipment was up on continued recovery in U.S. dispensers. We believe that our proactive intervention on production in Q4 has allowed excess channel inventory to clear and we expect this business in this segment to return to normal booking and shipping posture in 2024 with normal seasonality levered to quarters 2 and 3. Imaging & ID posted another as projected stable quarter against a difficult comparable period with a high degree of reoccurring revenue, end market and geographic diversity and exposures to growing regulatory requirements for product ID and traceability. This segment remains a consistent performer with strong margins and cash flows. Margin performance in the quarter was exemplary.

Pumps & Process Solutions was up organically in the quarter on strong shipments in polymer processing and precision components. The integration of FW Murphy is off to a strong start with a good reception from our customers and notable recent wins of substantial reoccurring revenue contracts in remote monitoring and smart compressor technology. Top line performance and climate and sustainability technologies was impacted by expected volume declines in beverage can making and as well as the recent and abrupt industry slowing in the broader HVAC complex in Europe and Asia, most notably in residential heat pumps, demand – the degree of which was not incorporated in our previous forecast. Margin performance was exceptional in the quarter, driven by improvement in food retail, which posted EBIT margins in excess of 15% in the fourth quarter, traditionally a seasonally slower quarter on positive CO2 product mix and productivity.

The food retail team deserves accommodation for their operational achievements to drive significant margin accretion in these past 3 years, but we still have further runway to improve largely on improved product mix. I’ll pass it on to Brad here.

Brad Cerepak: Okay. Thanks, Rich. Good morning, everyone. Let’s go to Slide 7. The top bridge shows our organic revenue decline of 3%, with acquisitions and FX translation contributed positive 1% to the top line in the quarter. FX resulted in a $0.01 tailwind in the fourth quarter but remained a $0.06 headwind for the full year, primarily driven by inter-year movements in the euro-dollar exchange rate. From a geographic perspective, the U.S., our largest market, was up 2% in the quarter, while Europe was down 16% on lower shipments in retail fueling and HVAC components. All of Asia was up 5%. China, which represents about half of our revenue base in Asia, was up 14% organically in the quarter, driven by large order timing within polymer processing.

On the bottom chart, bookings were up year-over-year due to normalization of lead times. Now on Slide 8. We are pleased with our full year free cash flow generation, which came in at $1.1 billion, nearly double the prior year’s level on working capital management and lower CapEx. On the working capital front, as previously discussed, we actively work to liquidate our working capital balances in 2023 with a particular focus on inventory reduction in the back half of the year. We believe we have further room to go on working capital improvement in 2024. 2023 CapEx came in lower after reaching a record level of investment in 2022. The step down in CapEx in ’23 was less pronounced due to a onetime $14 million opportunistic purchase of real estate within our Heat Exchanger business during 2023.

We expect CapEx to further step down into ’24. With that, I’m going to turn it back to Rich.

Richard Tobin: Okay. I’m on Slide 9. This highlights the results of some recent investments behind several fast-growing platforms and portfolio. A few years ago, these were nascent product lines with about $50 million in combined revenue. We saw a significant growth opportunity in these markets and proactively organically invested in CapEx and R&D to cultivate technological leadership and provide a sufficient foundation for these businesses to win and scale with customers. We are in the early innings of capitalizing on these investments and are excited about their long-term prospects. Across these markets, we enjoy leadership positions with recognized technology and strong relationships with marquee customers. With about $200 million in combined revenue planned for this year and a double-digit long-term growth trajectory, we expect these platforms to become meaningful contributors to Dover’s overall growth profile.

Slide 10 shows progress against our capital deployment priorities. After several years of elevated capital investments into capacity, productivity and automation projects, we expect capital expenditures to be lower in 2024. We continue seeking high confidence, high return on investment, organic investments, and we’ll prioritize those in our capital allocation decisions. Acquisitions remain part and parcel to building a better and stronger Dover. We have been actively shaping our portfolio in line with these priorities and we indicated to investors pulled through at – through additions and subtractions as we work to reshape and enhance the portfolio towards higher growth, higher return and lower cyclicality. Our cash flow position and capital allocation optionality are far superior compared to term [ph] last year.

We expect another year of solid free cash flow generation in ’24, with the added benefit of sale proceeds from DESTACO should close at the end of February, the beginning of March. We have ample balance sheet capacity to continue improving our portfolio through accretive acquisitions. We’re opportunistically return capital to our shareholders. Moving to Slide 11 shows the long-term financial performance of the portfolio. Despite the top line headwinds we experienced in ’20 and ’23 over the past 5 years, we have grown organic revenue at a 4% annualized rate ahead of GDP and industrial averages. Our margin performance over that period was solid, up 410 basis points in aggregate at a conversion margin in excess of our long-term targets we laid out and primarily driven by operational improvement and product mix.

Finally, let’s go to Slide 12. Our top line growth in 2024 will be driven by our secular growth exposed end markets, including CO2, data center cooling, heating, electrification and cryogenic components. The near-term outlook for precision components remain strong as demand for infrastructure investment tied to the energy transition is driving increased demand for our compressor components and engineered bearings. Our waste handling business is effectively booked for the year and to continue its double-digit growth trajectory as chassis shortage abates and haulers work to publish – replenish and upgrade their fleets. Based on recent history, we have incorporated appropriate caution in our forecast for biopharma during the year, but we are confident that we will post year-on-year growth in this end market, and we’ll update our view as the year progresses.

Full year consolidated operating margin is forecasted to improve on volume, product mix and productivity actions. We have done the hard work to get our channel inventories and balance and expect revenue to build off the fourth quarter exit rate with a return to pre-COVID seasonality in several businesses. Our portfolio consists of a collection of businesses that operate in attractive and unique – niche end markets. Our business model is flexible, and we can quickly respond in changes in market dynamics, be the beneficial or detrimental to the business. We have numerous cost control levels and capital allocation optionality at our disposal to deliver on our full year forecast. I’d like to thank our global teams for the efforts to deliver last year’s results, and we look forward to serving our customers, partners and investors in the year and ahead.

And Jack, let’s go to Q&A.

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Q&A Session

Operator: [Operator Instructions] We’ll take our first question from Andrew Obin with Bank of America. Please go ahead.

Andrew Obin: Hi, guys. Good morning.

Richard Tobin : Good morning.

Brad Cerepak: Hi, Andrew.

Andrew Obin: Just a question. Bookings have turned positive, I think, first time in eight quarters. How sustainable is this churn? And how much visibility do you have in bookings staying positive?

Richard Tobin : I would expect the bookings stays positive throughout ’24 based on our outlook right now. I think that the channel – we’ve done the hard work on the channel inventory, and that’s where we’re seeing the inflection in the bookings, whether it be biopharma and that we would expect to see the same in Fueling Solutions. So I don’t expect this trend – I don’t expect to go negative unless we’re going to have an unforeseen recession in 2024.

Andrew Obin: That sounds good. And then just a question on biopharma. Do you – just to clarify, do you have any biopharma recovery in the year? Because my understanding is that some of the inventory will become obsolete sometime in the first half of the year. So what is reflected in your guidance and what’s not? And I know that it’s been tough to call for the past 12 months. So clearly, some degree of caution is warranted.

Richard Tobin : It’s not a coincidence that we did this call behind some of our customers because we had been in front of them and been wrong. We have very little accretion in earnings on biopharma despite the fact that order rates are beginning to pick up, we’d rather position ourself cautiously. And if you go back and look at the transcript, it said we were just going to update you where we are quarter-by-quarter. So I think that we’re going to wait and see what we can say as we do not expect it to be down year-over-year, but we have not incorporated anything – any meaningful amount of operating profit up year-over-year. We’ll keep that to ourselves until we see the orders.

Andrew Obin: And am I correct in thinking that some of the inventory does become obsolete because it’s FDA regulated?

Richard Tobin : Yeah. You are absolutely correct.

Andrew Obin: Thank you.

Operator: The next question comes from Andrew Kaplowitz with Citi Group.

Andrew Kaplowitz: Hey. Good morning, everyone.

Richard Tobin : Hi, Andy.

Andrew Kaplowitz: Richard, Brad, maybe you could give us some more color on how you’re thinking about the 1% to 2% organic growth by segment? And then how are you thinking about the cadence of growth in EPS for the year? I know you said you would return to pre-COVID seasonality rich [ph] in a lot of your businesses. But is this year going to be more back-end loaded given the turn in short cycle is happening kind of now?

Richard Tobin : I think that it will start slowly. So I think the Q1 will be kind of a roll forward of what we saw in Q4 to a certain extent. But again, you’ve got some difficult comps. I would expect by Q2 – the vast majority of accretion will occur in Q2s and Q3 as we ramp production into that. And then Q4 – Q4 was actually pretty strong for us. Usually, it’s a run for working capital. But again, like every other year, it’s going to be highly dependent on production rates that we adopt for Q4.

Andrew Kaplowitz: Got it. That’s helpful. And then that you mentioned the intervening in clean energy and that you feel good about where your inventory is now, would you say you generally feel that way across the Dover portfolio? Maybe Heat Pumps is an exception or Heat Exchanges for you guys? And then back to Clean Energy, do you see good demand in that business? Or is it more easier comparisons that should drive it in ’24?

Richard Tobin : Well, there’s a lot of moving parts of what’s in Clean Energy. I’d – to back up for a moment. I think that the operating posture that we adopted at– as we move through Q3 into Q4, was predicated upon of dropping production to flush total channel inventory. And I think that we’ve accomplished that across the total portfolio. As you mentioned, I think what was not incorporated into our Q4 forecast was the sudden decline in demand on Heat Exchanges for Heat Pumps. Again, like biopharma, I think that we’re going to be very cautious about that for ’24 until we see the market return. So right now, I think that we’re calling Heat Pumps down year-over-year, but I think that, that may prove to be conservative. I think that my own view is it’s probably going to flush in Q1 and Q2, and then we’ll return to growth on the other side.

So overall, outside of Heat Exchangers for Heat Pumps, I think that we’re in pretty good shape in terms of balance. And so what’s incorporated into the 1 to 3 is basically that’s the aggregate of demand that we see. So production demand should be pretty much in balance. So we will probably build some inventory in Q1 as we ramp back up for Q2 and Q3, but that’s kind of the way we see it right now.

Andrew Kaplowitz: Can you grow DCST with Heat Exchangers down, Rich in ’24?