Dover Q1 2024 Earnings Call Transcript

Good morning.

Good morning.

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 exchanges in Europe. We would expect that trend to continue, which supports, basically, the seasonality where we expect some pretty big step-up in performance in Q2 and Q3, 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 of 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.

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. So I think that this fear of purchase compression on multiples has gone away. But it's not 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.

Thanks.

Good morning.

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 the second half.

Yes. I mean, I have to go back and look at the comps. But if you remember last year...

Sequential yes.

That's correct.

Yes, I don't think that there's any change.

I think the normal season [Indecipherable].

Brad left the room, Steve. Look, I think the seasonality that we would expect is where we're tracking right now. So Q2, Q3 up and then we leave some optionality in Q4, and that will, back to your question about order rates, Q4 will be depending on how we track. So there is potential upside in Q4 if order rates continue to build.

Yes. There's a nuance on order rates because the state goes now out of our order book and Jack can take you through that, but we still see sequential up even covering De-Sta-Co in the second quarter and through the year.

You know we don't give quarterly guidance.

Any other questions? That's a good Steve.

Right. Thanks.

I think it's because of the effect -- the negative effect on the heat exchanger business, which is accretive to that segment. The ramp is going to be very much predicated upon how much CO2 system volume we can get out between now and the end of the year. So I guess, to answer your question, is it will ramp, but you need to take into account when you're looking at comps that until we get into the back half of next year, we're going to be pushing up against the reduced volume and heat exchangers.

Yes, I think that's a nice, to be honest with you. I mean, the pricing that we have out there is relatively hold. It's got to be more mix related than anything else.

Yes. The portions of the business that are distribution, we don't see a build. We just see pass-through right now. So one would hope that we get a little bit of build, but that will be dependent on what we see on pull-through demand from here. So we've talked about this quite a bit, Julian. I mean we did a lot of work and took proactive work in the second half of the year. Our distribution channel checks don't show build, we just see pass-through right now. So it's not going to be a headwind. Hopefully, if demand continues to inflect positively, there will be a little bit of a tailwind.

Thanks.

Good morning, Brett.

It's all done now, right? If you went back and look sequentially at the biopharma business where shipments are heavy, that where we've lapped kind of that two and a half, three-year timeline now. So, there's still pockets of inventory out there and the system builds are relatively a headwind right now, but on kind of the processing side of the business is what is inflecting forward. So, we expect orders to be up from here just because of the fact that the inventory has been cleared one way or another over the last 36 months.

That's what we hope. I think it's -- I'm not going to size it for you right now because of the competitive aspect of the end market. What I can tell you is we feel good about where we are positioned from a spec point of view. I think that we're going to be a little bit of a trailer because we're a subcomponent behind a lot of the build that's going out right now. But what I can also tell you is we have prebuilt the production capacity that if it was to inflect kind of like what we saw in biopharma, we're going to be able to be there with industry-leading lead times.

Okay. We are shipping our first platform. We're going to be launching our second platform in the next couple of months. And then sequentially after that the third platform will be launched after that. What we have right now is early adopters. So, there are certain retail clients that because of ESG reasons and a variety of other reasons have chosen to be an early adopter in the space and not wait for the regulatory aspect of it. And then we've got a lot of customers that are buying individual units to test them out. So, I think we're in we're in the early innings here. But we like the trajectory.

Yes, it's mix, Joe. So, as the revenue climbs, the margin mix is important to the segment. And a way to look at it, frankly, is go -- look back a couple of years at the margin that we were at and what we actually didn't decline that much in consolidation because the balance of the segment portfolio actually performed quite well. So, I wouldn't think about it in terms of incremental leverage on a unit basis. I would look at it more as the revenue climbs, the segment mixes up from there.

We never really gave up any margin in the business. What we gave up was volume. So, like I said, it's not a business that you look at decremental and incremental margins. It's just mix up, mix down as a proportion of revenue.

Thanks.

Hi Andy.

Hi Andy.

Okay. Let me think about it. I think that, as I mentioned earlier, the only business that is performing worse than what was baked into our original forecast is the heat exchanger business in Europe for heat pumps, which is about --is about -- on a last year basis, i30% of our revenue. So we're going to have to mop up some of that.

Now, what we have offsetting that is CO2, right? And so I just answered Joe's questions about the trajectory in the market and to the extent that the demand continues to be solid, we should be able to mop up some of that decline. And Belvac was always baked into our forecast. So, we don't think that we will post top line growth in that particular segment until Belvac just basically bottoms from there.

And then we'd expect to inflect positively, hopefully, in Q4, depending on CO2 demand. The balance of the businesses are tracking by and large, exactly where we had forecasted. So, they're really going into the quarter because I think I mentioned that when we did the full year results, it was all about order momentum and so far, so good.

Look, I mean, I think from a margin heavy lifting point of view, think that's where we've got to do the most work. I think the management team is on it. So, you've seen us take some structural cost out of that business. What you need to understand is that business is from a proportion point of view, the one that's most exposed to distribution, right? So, it's had a pretty good headwind during the, let's call it, the destocking phase of 2023. So, it should run that was a business that that we can look to says, okay, incremental margin should be positive as volume flexes upward.

Thanks.

The demand trend is getting better now because of the headwind from destocking in the previous comps. And then after that, then you get to idiosyncratic product lines and business and geographies, but if you want a macro comment, right? And I think that we addressed it last year is even if you look back two years, unitary demand was relatively flat, right? There a lot of pricing flowing through the marketplace, but the unitary demand was relatively flat. And then because of interest rates, you had a negative headwind last year in terms of destocking.

So, going into this year, you're thinking positively, let's say, that we'll see about unitary demand year-over-year, whether it inflects up, but what we know categorically is that you don't have the headwind from destocking them, right, because it's just pass-through.

You can call Jack about that. Let's not get into -- I'm not going to page through all these documents.

Thank you.

They're clearly sitting on our product in inventory. So you've got kind of like you've got the market going down and then you've got inventory with -- because we're a subcomponent with our partners. So, we're going to go down first, I guess, is what I'm saying. We went up first as when pull-through demand goes up and everybody kind of puts inventory to allow for their estimates on the builds and now you've got the market turning lower and so that inventory that's out there has got to get depleted. So, our expectation is that our demand will inflect up before the end market demand kind of bottoms.

No, it wasn't a misspeaking, but it depends on the chip and it depends on the customer in terms of how - we're not getting into the details about it, you do need to get specified by the chip maker who makes recommendations to the builder, right? So we did the hard work in getting specified at the up end. But clearly, we're going to have sell into the build channel ultimately will be our customers as those units are built.

Apparently, everybody is in the space, including us. What I can tell you is it's a -- it's a unique product, number one; and number two, that the production requirements look very much like pharma and that is good for us because we're basically building these products in not the same facility. We've got a dedicated facility for these products, but we're going to run it more or less the way we run our connector business for biopharma. So I think we're in good shape from an IP point of view, and we're in good shape in terms of production capacity.

Thanks.

Hi, Scott.

I think that we're not going to be negative on price, for sure. I would expect us to be positive to price by the end of the year. I just think that the during supply chain issues and everything else, there was a little bit of solid days in price passing going on. And we weren't the big winners there to be perfectly frank. If you go back and look at our price realization through that period, arguably, we should have taken more.

But at the end of the day, to me, that's more of a non headwind going forward because all that capacity got built out if market demand is good, but it's not exactly robust. I don't think there were -- I think that we're positioned appropriately that we're not going to have to give back price because there's been a lot of price take over the last 36 months.

How do I want to answer that? I know that I'm on the clock, right? right? Did you give me 12 months. De-Sta-Co is a good example, That's a business that we looked at in terms of end market exposure and where we had taken it to from a margin point of view, we found a partner, we monetized it, I think, at a multiple that De-Sta-Co not trading within the Dover portfolio, so I think that, that optionality remains on other pieces of the portfolio, but you need to find ruling partners and the like, this is the first part of the question.

The second part of the question, Scott, is if we go back to 2018, 2019 that we said that we were not just going to go around selling stuff around here to dress up margin expansion. That's easy to do at the end of the day, but I don't think it's creating shareholder value. It's just creating optics. We've moved up the margin here substantially right? So I think that unlike 2018 and 2019, if we were to monetize pieces of the portfolio, we're going to get a lot more than we would have been back then to the extent that we can find a willing partner there. So I understand that the complexity of the portfolio is a difficult issue from a thematic point of view, but I'm not going to apologize for the value creation of -- that we've been able to extract from the portfolio. So we'll just retain that optionality going forward.

Thanks, thanks.

Well, when you take into account that our orders are dropping in heat exchangers and down -- maybe not in Belvac because Belvac built that backlog several years ago, but down in heat exchangers, the order rate is exclusively in the fact that we're launching a new product line in CO2 systems. So that's what's different.

Look, I mean they're going to continue well, CO2 is going to continue offset the heat exchanger business. Now the heat exchanger business has easier comps once we get beyond August because I think that inflected down in September of last year. So it may be a little bit of put and take between now and then because in CO2 systems, we tend to get large orders every once in a while to flex it up and down. But over time, I think that order rates should look good from the half year going forward, for sure.

Right. That's it, right? Because if we go back last year and the decline in revenue -- that wasn't a reflection of pull-through demand because it had the headwind of destocking. Now what you have is just basically, let's just call it pass-through. So we don't see stocking. We just see it pass it.

Hi, Dean.

It's stable, Deane. You have some inflection up and down between the equipment side that the consumable portion is generally a steady eddy. It doesn't flex up or down. You have little bit of price that goes through every year. I wouldn't be too concerned on quarter-to-quarter movements because they don't tend to be very high at the end of the day, and there's a lot of FX rolling through there just because of the fact that it is truly I think the only real true global business that we have. So it's steady, right? We don't see an inflection up in terms of production rates and consumer products. China seems to be, which was a headwind next year, seems to sequentially be improving. So we'll see from there, but it does run up against a strengthening dollar.

Let me take the last question first, it's design in. I'm sure that our commercial teams will say it's not that easy. But the fact of the matter is it's designed in predominantly. Now there will be a variety of different negotiations with the participants that are building out the infrastructure, but the most important part, it's kind of win the spec business early on and then we see where we go from there. Data centers in Europe, I'm going to have to get back to you. I don't think it's meaningful. I think that the data center activity that we see is more North American-based.

Thanks.