Dover Corporation (NYSE:DOV) Q4 2022 Earnings Call Transcript

Dover Corporation (NYSE:DOV) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Good morning and welcome to Dover's Fourth Quarter and Full Year 2022 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 of Investor Relations. After the speakers' remarks, there will be a question-and-answer period. 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, Gretchen. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through February 21, and a replay link of the webcast will be archived for 90 days. Dover provides non-GAAP information, and reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on our website. 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 the call over to Rich.

Richard Tobin: Thanks Jack. Let's get started with the performance highlights on Slide 3. Dover delivered strong organic revenue growth of 9% and margin improvement of 150 basis points in the fourth quarter. Volume mix, price cost and prior period cost reduction actions all contributed to the positive performance. As we've been forecasting throughout 2021, the relationship between supply chain constraints and bookings has continued to play out into Q4. The majority of the labor and component availability and logistics constraints have dissipated resulting in production lead times returning to pre pandemic levels. Importantly, our 4% annualized through cycle organic bookings growth rate reflects the continued secular demand strength across our businesses.

Our order backlog remains elevated compared to normal levels, and provides us with a good topline visibility going into . Our continuous efforts to improve productivity and efficiency principally enabled by advances we achieved in e-commerce adoption, back office consolidation and SKU or SKU complexity reduction, resulted in robust margin accretion in the quarter. We expect benefits from our research efforts to further accrue in 2023. We continue to deploy capital toward portfolio improvement, organic growth and production efficiency in 2022. Our capital expenditures in 2022 were the highest in recent Dover history and we continue to invest in manufacturing productivity projects and proactive capacity expansions to fuel our top line growth and margin improvement capabilities.

We also completed five attractive bolt-on acquisitions in 2022 that provide exposure to high growth technologies and end markets and finally, we took the opportunity to return capital to our shareholders, including the completion of our 500 million accelerated share repurchase, which was completed in quarter four. We entered 2023 with a constructive stance. Demand trends remain healthy across a portfolio and we have a significant volume of business in backlog entering to the New Year. Expected revenue growth price actions and productivity measures from 2022 lay the foundation for margin accretion in 2023 have high confidence in Dover's end markets, flexible business model and proven execution playbook continuing to deliver earnings growth. Our strategy for robust through cycle shareholder value creation remains unchanged, to combine solid and consistent growth above GDP, strong operational execution generating meaningful margin accretion over time, and value added discipline capital deployment.

As a result of this, we are forecasting for -- guided revenue guidance of 3% to 5% Organic revenue growth and adjusted EPS of $8.85 to $9.05. I'll skip slide 4, and let's move on to Slide 5. Engineered Products revenue was up 16% in the quarter continuing the trend of double-digit top line growth through the year. Revenue growth was broad based across the portfolio of particular strength in North America. Margins continued the sequential build throughout the year finishing -- 20% at 620 basis points year-over-year primarily driven by improving supply chains and price cost dynamics products mix as well as events investments and productivity initiatives. Clean Energy & Fueling finished the quarter and the year roughly flat on organic basis. Revenue performance for the quarter was up and clean energy components.

Vehicle wash, fuel transport and below-ground retail fuel, offsetting the comparable declined a dispenser and EMV card readers in the period. Margins in the quarter were up 170 basis points on positive price cost and the mix impact from both organic, inorganic investments that we made in clean energy components and vehicle wash. This was augmented by further cost reduction actions initiatives in the third quarter, and the full, the full year carry over these actions will continue to accrue in 2023. In Imaging & Identification, volumes for our marking and coding printers, spare parts and consumables were strong in all geographies, with the exception of near term softness in China due to the COVID impact. Our software businesses continue to perform well with penetration of key customer brand accounts with strong growth in SaaS portion of our serialization software.

FX remained negative headwind to absolute revenue and profits in the segment given its large base of non-US dollar revenue. Q4 margins in Imaging & ID were very strong at 25% improving 250 basis points on stronger volumes, pricing actions and products product mix richness. This business has delivered exemplary margin improvement in the last few year years as it utilizes our productivity tools for e-commerce back office consolidation and offshore engineering. Pumps & Process Solutions was up 4% organically for the year but posted a 4% decline in the fourth quarter driven principally by post-COVID transition in the biopharma space. The non-COVID biopharma business has continued to grow and our overall biopharma business as well above its pre-pandemic level.

New orders for biopharma connectors reflected positively in the fourth quarter after several quarters of sequential declines. All other business this segment posted solid organic growth in the fourth quarter with particular strength in polymer processing equipment and precision components in the back of improved conditions in energy markets. Operating margin for the quarter was 29% is comparable revenue mix of products delivered. Top line in Climate & Sustainability technologies continued its double digit growth in the fourth quarter posted 27% organic growth across all business geographies. Demand trends remain particularly robust in heat exchangers and CO2 refrigeration systems driven by the global investments in sustainability. Our capacity expansion programs in both these businesses remain on schedule and will continue to allow us to continue to meet growing customer demand.

Margins are up 450 basis points in the quarter and over 300 basis points for the full year on improved productivity in food, retail and strong volume growth and good mix of product delivered. I'll pass it on to Brad here.

Brad Cerepak: Thanks, Rich. Good morning, everyone. I'm on Slide 6. The top bridge shows our quarterly organic revenue growth of 9% driven by increases in four of our five segments. As expected FX was a substantial headwind at 5% or $94 million and impacted both revenue growth and profitability. FX headwinds resulted in Q4 and full year 2022 negative EPS impacts of $0.10 and $0.35 respectively. Recent euro gains against dollar have reduced our forecasted FX headwinds in 2023, which we currently estimate at $0.05 to $0.10 for the full year EPS. M&A contributed $58 million to the top line in the quarter, a product of $80 million from acquisitions partially offset by $22 million from divestitures late in 2021. We saw a strong organic growth across most of our geographies in the quarter.

The U.S. our largest market was up 7% organically, Europe was up 19% organically driven by particular strength in polymer processing, beverage can making, natural refrigerate systems and heat exchangers. All of Asia was down 1%. China, which represents approximately half of our business in Asia declined by about 10% in Q4, driven by short term impacts from the COVID resurgence. On the bottom chart, bookings were down year-over-year due to foreign exchange, translation and normalizing lead times across several businesses. Now on our cash flow statement on page, slide 7. Free cash flow for the year came in at $585 million, down year-over-year on increased capital expenditures, onetime tax payments and investments and working capital supporting growth.

At our current earnings margin, we would expect to generate free cash flow of approximately 13% of revenue in an average year. 2022 free cash flow lagged behind that level, due primarily to elevate a working capital investment striving two thirds of the gap. As previously discussed, our view -- we view incremental investment in inventory over the past two years as productive despite its carrying cost enabling us to deliver 17% cumulative organic top line growth and over 30% growth in absolute EBITDA between 2019 and 2022. We are now focused on extracting back cash invested in inventory. As supply chain is improved in the fourth quarter, we began reducing inventory particularly finished goods. The majority of excess we carry into 2023 is in raw materials and we expect to consume a significant portion of that excess in the first half of the year.

In addition to inventory reductions, we expect to collect elevated receivables from the fourth quarter and normalize our payable balances driving significant improvement in working capital in 2023. We also forecast lower CapEx followed following a stepped up cap next year in 2022. As a result, our forecast for 2023 free cash flow is between 15% and 17% of revenue. I'll turn it back to Rich.

Richard Tobin: Okay, I'm on slide 8. I'll be brief on this slide since we've been discussing the linkages between bookings, backlog and revenue and expected trajectory of these metrics for nearly two years. First to remind everyone that in 2021 bookings of $9.4 billion driven by post-COVID demand surge, as well as constrained supply chains the required customers drew order in advance were roughly 20% higher than our revenue that year resulting in an unprecedented backlog that requires time to ship and unwind while bookings normalize. Importantly, concerns about double ordering and cancellations did not materialize. And we have been depleting the backlog in an orderly fashion as product lead times improved. If we smooth out the post pandemic surge in bookings our bookings CAGR has been 4% from 2019 to 2022.

Let's go to Slide 9 here, we show the growth and margin outlook by segment for 2023. that underpin our guidance. We expect Engineered Products to remain solid. Pent-up demand and automation initiatives and waste hauling support our robust outlook. Despite high demand, our refuse collection vehicles shipments in 2022 is still has not recovered to pre-pandemic levels due to chassis availability. After an excellent performance in vehicle services group in Q4 we expect a slower start in 2023 and Engineered Products is forecast to improve margins in 2023 on solid volumes benefits from our recent productivity capital investments taking hold and positive call price cost tailwinds. Clean Energy & Fueling is expected to grow single digits organically which we expect to be second half weighted due to demand for dispensers during the year.

Dispenser bookings beginning to normalize, we expect Q1 to be the trough for the business with gradual recovery through the remainder of the year. All other businesses in the segment are positioned well for growth in 2023, with particular strength in our clean energy components. For the year we expect margin improvements in Clean Energy & Fueling and volume recovery, improved mix and recently enacted restructuring actions and above ground fueling. Imaging & ID is expected to continue its trajectory steady GDP growth and attractive margins. We see robust demand for new printers and components and consumables and professional services the outlook for the bulk serialization and brand protection software is also strong. Margin as business are robust and we expect them to remain as such to 2023.

We project flat organic growth in pumps and process solutions. Our industrial pumps and plastics and polymers, precision components and thermo connector businesses are all positioned for solid growth. The biopharma components business is expect to hit its bottom in volume and margin in the first quarter as customers worked through and repurpose excess inventory. We are beginning to see encouraging signs and bookings for our biopharma connectors, and our full year forecasts may prove to be conservative. The long-term tailwinds of single use components for biological drug manufacture remain compelling. And importantly, our products are specified for regulated manufacturing of therapies with attractive growth outlook. And we continue to win new specifications and an active pipeline of new biologic and cell and gene therapies.

Margin performance is expected to be roughly flat for the year with a sequentially lower level in the first and second quarters on unfavorable product mix from slower biopharma and geographic mix from higher sales in China, for plastics and polymers. Growth outlook for climate and sustainability technologies remain solid as our businesses continue to ship against strong backlog levels. We are forecasting continued double-digit growth in both natural refrigerant systems and heat exchangers for heat pumps. Our beverage can making businesses booked well into 2023 and expect continued margin improvement in 2023 on volume conversion, productivity gains and mix. Move on to Slide 10. Here we show our recent performance against our capital allocation priorities, our priorities to reinvest in our business, which represents the highest return on investment.

2022 represented a recent record for CapEx with numerous capacity expansions and productivity investments completed. We will continue our efforts to add attractive bolt-on acquisitions to improve our portfolio by entering new markets with secular growth. We invested $325 million into five highly attractive acquisitions in 2022. We're carrying significant firepower in a compelling M&A pipeline into 2023. Finally, as we did in 2022, we will return excess liquidity to our shareholders through increased dividends and opportunistic. Let's move onto Slide 11. For the wrap up, before we get into our full year guidance I'll make a few comments on our view of the macro environment and how we believe the year may develop. First and foremost, we hope that the Fed is cautious going forward from here.

We support the efforts to tackle inflation, which had had a large hand in causing but we are in the camp that believes the Fed has gone far enough and the lagged effect of the further actions can be problematic to economic growth. Market participants are likely to be cautious with the timing of their demand generating decisions as there is a recognition that manufacturing lead times and logistics constraints have been largely repaired. And as such, we expect first quarter demand to reflect this cautious stance. We expect seasonality to the year to be weighted towards quarters two and three in revenue and earnings and weighted to H1 for cash flow as our balance sheet reflects liquidation of inventory and receivables from 2022. Despite the uncertain macro, our goals remain ambitious, we will push hard to win our share of demand.

We have done a lot of work to improve the performance of our products and we believe we would have the right to win. We have proactively expanded capacity to meet projected demand and areas of the portfolio with significant secular growth opportunities. So now let me put our guide in EPS performance of the longer term perspective. Our objectives delivered double-digit through cycle EPS growth for our investors through a balanced mix of healthy revenue growth, margin accretion, value creative capital deployment. We have been delivering on that equipment that had led to that commitment, and we drive will continue to drive to continue to do so. I want to thank our customers for trusting Dover businesses to deliver on their important needs. And I'm grateful to Dover teams across the world for continuing to serve our customers and execute well despite various challenges along the road.

That's completes the comments. So Jack, let's go to questions.

See also 25 Least Developed Countries in Europe and Top 20 Financial Cities in the World.

To continue reading the Q&A session, please click here.