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Dover Corporation (DOV) Q4 2023 Earnings Call Transcript

Dover Corporation (DOV)

Q4 2023 Earnings Conference Call

Company Participants

Jack Dickens - Senior Director, Investor Relations.

Richard Tobin - President and Chief Executive Officer

Brad Cerepak - Senior Vice President and Chief Financial Officer

Conference Call Participants

Andrew Obin - Bank of America

Andrew Kaplowitz - Citi Group

Scott Davis - Melius Research

Mike Halloran - Baird

Steve Tusa - JPMorgan

Joe Ritchie - Goldman Sachs

Jeff Sprague – Vertical Research

Julian Mitchell - Barclays

Nigel Coe - Wolfe Research

Deane Dray - RBC Capital Markets

Presentation

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....

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