Dover Corp (DOV) — Q3 2021 Earnings Call Transcript

Thank you. Good morning, everyone, and thank you for joining our call. This call will be available on our website for playback through October 26th, and the audio portion will be archived for three months. 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 that are subject to uncertainties and risks. We caution everyone to be guided in their analysis of Dover by referring to our Form 10-K and our most recent Form 10-Q for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law. With that, I will turn this call over to Rich.

Thanks, Andrey. Good morning, everyone. Let’s go to page three. Dover Corporation and its operating companies had a solid quarter. The performance stats indicate that our product strategies, coupled with our ongoing productivity initiatives, continued to deliver topline growth, margin accretion, and attractive cash flow to our investors. Our revenue and bookings growth continued to outpace our pre-pandemic levels and we exited the quarter with a record high and sequentially increased backlog while posting topline growth of 15% over the comparable period. Demand strength was broad-based as each segment posted year-over-year growth in bookings and a book-to-bill above 1. Revenue growth, positive product mix, and ongoing productivity initiatives drove comparable operating margins up, resulting in a 31% increase in U.S. GAAP diluted earnings per share. Our free cash flow performance was strong with an 18% year-over-year increase, despite significant investments we’ve made in inventory as we begin to reap the benefits of our investments in the centralization of financial processing activities. We continue to enhance and improve our portfolio with several acquisitions completed in the last three months and the divestiture of our commercial foodservice business announced last week. Our organic investments and capacity expansions and productivity projects are on track, providing us the building blocks for the future topline growth and margin expansion. As one of the first multi-industrials to report each quarter and because of our wide end-market exposures, we have the pleasure to be the operating environment bellwether, so let’s get on the front foot here by providing some color on inflationary inputs, labor, and supply chain challenges, so that we have time to discuss the constructive demand environment for 2022 in the Q&A. Let me start by saying that we’re particularly concerned that there have been no discernible policy changes, particularly in the U.S. to deal with these headwinds, and in fact many proposed policies run the risk of extending their duration. We take no satisfaction in the fact that we’ve been telegraphing these issues all year and incorporating them into our forecast of the businesses that bear the brunt of these challenges, which I will expand upon during the segment review. We have taken the appropriate actions to offset these headwinds moving into 2022, and we are comforted by the fact that we have been given the opportunity to demonstrate the resilience of our business model and the strength of the breadth of our product and geographic market exposures that are ultimately reflected in these quarterly results. To be clear, we are very constructive about 2022 demand for our products and services and remain optimistic that there will be a recognition that protecting the duration of the current strong economic demand environment needs proactive policy decisions. We are raising our full-year EPS guidance as a result of our strong year-to-date performance. Our updated forecast does not incorporate any material improvement nor deterioration of the challenging operating environment in the fourth quarter. Our priorities remain the same: supporting our customers with products and services for the long-term, and the health and welfare of our employees. I will skip to slide four, which provides a more detailed review of our results for the third quarter. So let’s move to slide five. Engineered Products revenue was up 14% organically with a significant portion of the growth from pricing actions. Vehicle Services posted a strong topline quarter and market indicators remained positive, with vehicle miles driven recovering and average vehicle age continuing to increase. Industrial Automation demand was up double digits with strong activity in Americas and China. Environmental Services Group revenue was up year-over-year and its backlog remained strong moving into 2022. Aerospace and Defense posted a decline year-over-year, largely as a result of changes in programmed shipment timing. The margin performance in the quarter was unfortunately what we expected to occur as we progressed through the year. Our Engineered Products segment, as we’ve discussed previously, has the largest exposure to raw materials, assembly labor as a percentage of cost of goods, and supply chain complexity. As such, it is more than just a price cost issue where even an equilibrium drives negative margin performance. It is exacerbated by numerous component supply issues that necessitated us to intermittently curtail production to stabilize the manufacturing system in the quarter. Our management team is doing exactly what we would expect of them to protect profitability in the short-term while managing the relationships with our strategically important customers. I have absolute confidence that the profit margin in the segment will bounce back as we move into 2022 as a result of actions already taken in price and as raw materials and supply chain constraints moderate, as can be seen in the raw materials futures and stabilizing container shipping rates. Fueling Solutions was up 3% organically in the quarter on solid demand in North America for above-ground and below-ground retail fueling. We believe our production schedule and delivery times are driving share gains particularly in the above-ground category. Vehicle wash posted another strong quarter with some encouraging customer conversion and cross-selling benefits from our recent ICS acquisition. Activity in China remains subdued, driven by the lasting impacts of COVID and near-term uncertainty related to energy supply. Fuel Transport Components were negative for the quarter, but we believe that this is expected to improve moving forward. Margins in the segment declined 150 basis points in the quarter, as productivity headwinds from supply chain constraints and subcomponents and negative mix more than offset higher volumes and pricing. We have taken the appropriate actions on pricing to counter these headwinds going forward. Sales in Imaging & Identification grew 7% organically. The core Marking and coding business grew well on good demand for printers and consumables. Serialization Software also grew ahead of expectations and we are working to add additional resources here as we integrate the recently acquired Blue Bite brand management software into our solutions. The Digital Textile Printing business was up significantly year-over-year against a low bar comparable quarter and is continuing its gradual recovery. Margins in Imaging & ID improved by 250 basis points as volume leverage, pricing, and productivity initiatives more than offset input cost inflation. Pumps & Process Solutions posted another solid quarter with 25% organic growth. Demand for biopharma connectors and pumps continued to be strong. We continued to expand clean room capacity for our biopharma connectors and single-use pumps in the period and we are encouraged by specification wins in Em-tec Biopharma flow meters, which we acquired last year. Industrial Pumps were up based on broad-based end customer demand with particular strength in China. Precision Components was up year-over-year as compression OEM and aftermarket businesses continued their recovery. Polymer Processing was down in the quarter due to a combination of shipment timing and a very strong third quarter from the prior year, though new order rates remained strong and outlook is positive moving into 2022. Margins in the quarter expanded by a robust 630 basis points on strong volume, fixed cost absorption, favorable product mix, and pricing. Topline results in Refrigeration & Food Equipment remained strong, posting 16% organic growth. Revenue in beverage can-making equipment doubled in the quarter. The business is booked into late 2022 and is taking orders for 2023. The heat exchanger business grew on robust demand in all geographies, led by residential heating and industrial end markets, and a recovery in the global commercial HVAC demand. Order intakes continue to exceed our ability to ship, so we are adding additional capacity in two geographies to ensure that we can meet forecasted demand in 2022. Demand in Food Retail remains robust, with elevated bookings and backlogs across all our product lines. However, much like our Engineered Products business, we have a difficult time with labor constraints, and in particular, subcomponent supply, which has necessitated significant operational cost in logistics, intermediate production curtailments, and in one case, the deferment of a delivery into 2022. Again, management is straddling cost recovery actions and meeting the demands of our customers, but it clearly comes with a cost. Margins were largely flat in the quarter as excellent operating performance and swept and Belvac offset refrigeration headwinds despite their smaller revenue base. I will pass it to Brad here.

Thanks, Rich. Good morning, everyone. Let’s go to slide six. On the top is the revenue bridge. Our topline organic revenue increased by 13% in the quarter, with all five segments posting growth, with strong demand in our Engineered Products, Pumps & Process Solutions, and Refrigeration & Food Equipment segments. FX benefited the topline by about 1% or $21 million. Acquisitions added $18 million of revenue in the quarter. There was no year-over-year impact from dispositions. The revenue breakdown by geography reflects strong growth in North America and Europe, our two largest regions and modest growth across Asia and the rest of the world. The U.S., our largest market, posted 16% organic growth in the quarter on solid trading conditions and retail, industrial automation, biopharma, and can making. Europe grew by 16% in the quarter on strong shipments in marking, coding, biopharma and industrial pumps, can making, and heat exchangers. All of Asia was up 5% organically on growth of biopharma and industrial pumps and heat exchangers, partially offset by year-over-year declines in polymer processing, below-ground retail fueling, and fuel transport. China, which represents approximately half of our business in Asia, was up 8% organically in the quarter. Moving to the bottom of the page, bookings were up 25% organically, reflecting the continued broad-based momentum across the portfolio. In the quarter, we saw organic growth across all five segments. Let’s go to the earnings bridges on slide seven. On the top of the chart, the adjusted segment EBIT was up $64 million and adjusted EBIT margin improved 80 basis points, as improved volumes, continued productivity initiatives, and strategic pricing offset cost inflation and production stoppages. Going to the bottom chart, adjusted net earnings improved by $57 million, as higher segment EBIT and lower corporate expenses more than offset higher taxes. Deal expenses in the quarter were $3 million. The effective tax rate for the third quarter excluding tax discrete benefits was approximately 21.8%, compared to 21.5% in the prior year. Our effective tax rate estimate pre-discrete for Q4 and the full year remains unchanged at 21% to 22%. Discrete tax benefits were $8 million for the quarter or $4 million higher than in 2020 or approximately $0.03 of year-over-year EPS impact. Rightsizing and other costs were a $2 million reduction to adjusted earnings in the quarter, as a one-time recovery related to a cancellation settlement more than offset our ongoing productivity and rightsizing initiatives. Now on slide eight. We’re pleased with the cash performance thus far this year, with free cash flow of $667 million, a $104 million increase over last year, free cash flow conversion stands at 11% of revenue year-to-date, despite a nearly $250 million investment in working capital. As we discussed last quarter, we remain focused on delivering against our customers' strong order rates, and we are carrying high inventory levels to ensure we can meet current demand for the rest of the year and into next year. Let me turn it back to Rich.

Thanks, Brad. I am on slide nine, which is a familiar format we used during the Investor Day in 2019 to describe our inorganic growth priorities. I am pleased to report that our activity since then has aligned well with those priorities and we remain busy adding logical logistic bolt-ons that will support the long-term growth of our core businesses. As you can see that we are investing in the highest priority platforms with an emphasis on high growth, high gross margin products and solutions. We remain disciplined in our approach to acquisitions and despite the challenging asset prices in today’s environment, we have acquired seven bolt-on acquisitions year-to-date that meet our investment return criteria, including two in the third quarter and one that closed last week. The most recent deals highlighted in green were CDS, an industrial 3D visualization software, which we expect to grow in third-party revenues and also adopt across the Dover portfolio in our journey towards digitizing the front end of our businesses, lowering our transaction costs. SP, which complements our Aerospace and Defense business, is a software-driven signal intelligence solutions and LIQAL, which is an emerging leader in LNG and hydrogen dispensing solutions. Each transaction is a modest addition to our aggregate portfolio, but we are very excited about scaling up these innovative and strategic technologies over time and the positive impact to EPS as these investments mature. We remain on the hunt for acquisitions and have a solid M&A pipeline that aligns well with our portfolio priorities. We also took advantage of recent market activity in the Food Equipment sector to sell Unified Brands, a professional cooking equipment business for commercial foodservice operators. The deal was announced in early October and is expected to close in the fourth quarter. Unified Brands represents less than 2% of our overall revenue and its sale will have a negligible impact on our 2021 adjusted EPS. I would like to thank the management and employees of Unified Brands for the many years of service in the Dover family. As we look to the end of the year, demand outlook remains favorable across the majority of the portfolio, backlogs and bookings remain robust, and we expect to post strong organic growth in Q4. Overall, we remain on track to deliver strong returns this year through a combination of robust growth in revenue, operating profit, and cash flow, coupled with disciplined capital allocation. We also look forward to closing out this year and laying the foundation for what we believe to be a positive demand environment in 2022. We have clarity about the nature of the inflationary input and supply disruption costs that we incurred in Q3 and expect to queue in Q4 due to the challenging operating environment, and we have conviction that we can turn them into profitability tailwinds as conditions improve and the calendar progresses from here. Before wrapping up, I would like to thank Dover for all their perseverance and accomplishments executing in today’s environment. And with that, let’s turn it to Q&A.

Thank you. Good morning, everyone.

Hi, Jeff.

Hey. Hi. Great color here. Hey. First, just on inflation, Rich, it sounds like supply disruptions and what they did in your factories was much more of a challenge than getting price to overcome cost. Can you just address that a little bit more, and were you relatively price-cost neutral in the quarter?

We were not price-cost neutral in the quarter in the segments where you can see the dilution at the operating margin. So, it’s a little bit of a two-fold story. Where we’re getting the most price is where we’re getting impacted the most, because not only are you driving price increases, driving the topline, even in equilibrium that’s dilutive to operating margins. So, when you’re in a negative position, you get kind of a 300-point dilution. So the bad news is we’re not in equilibrium in Q3. From here, we’d begin to squeeze that down in Q4 and if conditions don’t deteriorate, go positive moving into 2022.

And then unrelated but the backlogs and what you’re kind of pointing to here in Q4, it looks like at the midpoint, your Q4 revenue has guided down about 9% sequentially, which would be more than normal, and certainly seems high, especially relative to the backlog. So, could you just address that and give us a little more color on how you might be able to uncork these backlogs and the visibility, and maybe what a normal backlog situation would look like?

Yeah. I think that we’re hopeful that we can get out what we’re projecting in our guidance. Clearly, not in the revenue but the EPS, we’re driving towards the top end here. But it’s a normal Q4 despite and Brad went over cash flow. We will run for cash somewhat at the end of the year. We have certain businesses that are seasonal that don’t deliver much in December and we lose production days just because of Thanksgiving and Christmas. So, we’re talking about double-digit growth quarter-over-quarter into Q4, and we’re going to endeavor to get it out, Jeff.

Hi. Good morning.

Hi.

Hi, Steve.

Hey. Just to clarify on that last one, you said price-cost neutral, so pricing was, I think, 3.5% or something like that, so roughly $60 million of kind of favorability. Do you mean on kind of an absolute basis that you had more cost inflation than that in the quarter?

Yeah. I mean, there’s three buckets, right? There is raw materials, there’s logistics and supply chain, and then there’s business interruption costs that we incurred during the quarter. The vast majority of the negative impact is reflected in the segments that you can see, and a conservative view of what that cost was in the quarter is somewhere in the order of $25 million to $30 million in EBIT lost. That compresses in Q4 on a lower revenue line.

Right. That’s from the disruption you said, like, kind of like disruption…

That’s all three.

That’s all it.

Okay. So then why wouldn’t it be positive price-cost, if that’s the case?

A significant portion is still in inventory, so there are factors related to raw materials inventory and the backlog of orders, which depend on when the orders were placed and when they will be fulfilled.

Right.

…two most effective businesses that we have, the price-cost in total, including all three categories narrows from the number that I just gave you, but it does not get positive. Without getting granular here, it may get positive on raw materials, but not pick up logistics on the logistics side. From a total portfolio point of view, I think that we are in neutrality in Q4.

Right.

Got it. And then are these supply constraints, like, is there anything that really stands out, are there like onesies and twosies of components or is there something that really stands out, and ultimately could you give any visibility on kind of, I guess, the million-dollar question is timing of resolution on these things. I mean, are we going to be going into the second quarter of next year still kind of dealing with this stuff in your view?

As Brad mentioned, we're holding onto our inventory, so we won't be liquidating all of it in the fourth quarter. We are somewhat over-ordering components due to ongoing issues. It was hydraulics in the second quarter and, to a degree, at the start of the third quarter. That situation is improving, but now we're facing challenges with electronic components. There are many factors at play, but the problem is that it only takes one missing item to impact us. It's not getting worse, but I'm worried that policy decisions could exacerbate the situation. Frankly, I don't have strong confidence that announcements regarding port activities will significantly affect us in the short term. However, since we've been over-ordering somewhat, I believe things should stabilize. Still, I can't predict how much improvement we will see in the first quarter, other than to say we expect positive pricing trends to carry into that period and that the projections for raw materials look promising.

Great. Thanks a lot. Appreciate the color.

Thanks.

Hey. Good morning, guys. Rich, nice quarter.

Thanks, Andy.

So you ended up recording mid-20% incrementals in Q3 and you’re projecting something close to that in Q4. It’s still kind of in your range or close to your range of that 25% to 35%. So you talked about price versus cost starting to turn, as you look out into 2022, how much confidence does it give you that you could deliver incrementals at or above 25% to 35%, given all of the ongoing projects you have? You’ve got productivity projects in DP. You’ve got that structural cost that you always talk about. So do you have more confidence, given how well you’ve performed with these headwinds this quarter?

I believe that the inflation we are experiencing is primarily related to labor. While we are optimistic about a slight reduction in raw material costs and the delayed impact of recent price increases and inventory turnover, we are confident that we can restore the margin profile of the most affected business. Each year, we aim to counter inflationary pressures at the factory level through improved productivity. Although we need to enhance our efforts because of labor inflation, I think this is achievable.

Got it. I’d like to ask about DPPS. We understand you’ve been expanding your capacity in biopharma and have mentioned that. It seems there’s been a cyclical improvement in Precision Components as well. This segment has grown over 20% compared to 2019, with a backlog up by 90%. Some individuals are concerned that DPPS might face tougher comparisons in the future. Given your own investments, do you expect DPPS to remain one of your fastest-growing segments, and how do you plan to maintain the recent margin performance?

We are asked this question every quarter, and the answer is yes. As mentioned during the call, we are expanding capacity, which indicates that we are proactively addressing the demand environment heading into 2022. We might experience some margin reduction due to product mix, but it won't be significant. We view this situation as understanding the substantial impact on year-over-year profitability for the group. However, we do not plan to depend on that level of profitability change moving forward. That said, we have plenty of resources available. Regarding your other question about what we can carry forward in the portfolio for next year, we do not require that same level of growth next year when considering the scale of this year's earnings change.

Appreciate it, Rich.

Thanks.

Hey. Good morning guys and thanks for being bold and being first of reporting for stupidity, one of the two, but nonetheless…

Okay. Scott, go ahead.

Yeah. Rich, you talked a little bit about how you’re strategically building inventory, are your customers strategically building inventory too? Is there a chance that some of the channel’s getting a little fat in certain SKUs?

Not in inventory. I mean, it’s a big question. Look, one of the things we’ve been discussing all year is the backlogs are so large. Is that being influenced? Sure, it’s being influenced, because the supply chain constraints are becoming so difficult. No one wants to live with that next year. So lead times are stretching out and that’s reflected in the backlog to a certain extent. I am not aware and based on the yelling and screaming that goes on around here about getting the product out the door, that we’ve got any channels that are carrying excess inventory. Pretty much right now, everything that we can get out the door, our customers and distributors will take.

Okay. And Rich, can you just help understand, you talked about curtailing some production. Are you talking about, I mean, logistically, help us understand what that means. Did you shut something down for a week and give everybody paid time off? Is it just a shift here and there? I mean, what’s the extent of when you do a shutdown like this and are you eating full labor costs and such in that time period or are there adjustments that are made with in that regard?

It's a mixed situation. At some point, you can't have units that are only partially built; you need to manage logistics effectively. When it comes to refrigeration units, ESG truck bodies, and vehicle lifts, you've reached a stage where the cost of finishing those products becomes impractical. It becomes quite complicated, so you have to make the decision to halt production. Sometimes this might mean stopping for two or three days or even just for a shift, depending on how inventory is arriving. I would say that the size of the items plays a significant role in this. For smaller components like pumps, we have enough storage to handle them. However, when it comes to larger items like truck bodies or refrigerated units, it may be better to halt the entire production line for a few days. In that case, you don't need to maintain all the labor, but most of it still needs to be retained. Therefore, the negative absorption is what you would typically expect.

Okay. Good luck in 4Q. Thanks, guys.

Thanks.

Hi. Good morning. Maybe just wanted to circle back, unfortunately, to this sort of price net of cost topic.

Yeah.

Stepping back from the sort of quarterly back and forth, so for full year 2021, what is that net dollar price cost headwind, is it sort of $10 million that type of range? And then when we think about next year, do you think Dover should benefit from a lag as we see those forward cost curves come down, maybe that’s reflected in the real costs coming in? What’s the ability of your pricing to kind of hang in there relative to that cost normalization next year if we see it?

We began discussing raw material price costs in Q4 and Q1 of last year, where we anticipated a neutral position. However, we then faced labor inflation and supply chain issues, which have added complexity. It is our responsibility to counteract these challenges through enhanced productivity. Currently, we estimate a negative impact of $25 million to $30 million in the two segments that experienced dilution this quarter. We expect some improvement in Q4 due to increased revenue compared to Q3 and adjustments in pricing as we reduce older backlog. If everything remains stable, as older backlog re-prices because of our pricing strategies throughout the year, we anticipate this will shift to a positive effect in Q1, assuming conditions don't deteriorate and that market pricing remains steady, which we believe will be the case.

Got it. And so through next year where you do get that spread or do you think the market is sort of too efficient for that?

Well, we’re going to have to fight it out Julian. And we’ve taken the pain to make deliveries to our customers and we’ve been having discussions with them that we’re not re-pricing backlog in a lot of instances. So we are taking it through the P&L, which also means that as future prices of metals come down, we’re also not re-pricing the backlog that we have and so our backlogs are actually up sequentially despite the fact having 15% growth. So it’s not going to be easy but that’s kind of the way that we’re managing the process.

That’s very helpful. And just a last one on this point, so your gross margins up a lot in the first half, down slightly year-on-year in the third quarter. Should we assume by first quarter next year as things look today that it’s up year-on-year again?

Year-on-year, I don't have the gross margin for Q1 in mind, but I would expect our projections for most of the portfolio to show topline growth next year. I'm not aware of any negative segment mix, so based on absorption alone, we would anticipate that.

That’s great. Thank you.

You’re welcome.

Hey. Yes, guys. Good morning.

Good morning.

Hi, Andrew.

Hey. Just in terms of supply chain disruption and folks talked about it, but could you quantify the magnitude of delayed shipments on third quarter revenue and if supply chain issues remained the same in fourth quarter? I mean, should we think about these showing up in 2022, I mean, what happens with all these delayed shipments?

Well, first and foremost, our guidance incorporates our view of what happens going forward, number one. Number two, could we have shipped more in Q3? Clearly, we could have. I think that this argument about lost revenue is an interesting one, because everybody, I suppose, all market participants claimed lost revenue, because demand is high and supply constraints are tight. So monetizing that as lost is a little bit of a fool’s game. We could have shipped out more in Q3. It would have reduced our backlog slightly is my presumption, and I don’t believe that it would allow us to ship more in Q4 materially.

Got you. And can you just touch on cadence of bookings as you went through the third quarter and any early feel for changes here in the fourth quarter, I mean, clearly, the end market looks robust, but maybe a little bit more color?

I think the last time we discussed this was in August, when we mentioned that August is often a volatile month for bookings, so we expected to gain more clarity as the quarter progressed. It’s evident that things improved in September and October according to our reported results. I anticipate a slowdown in the run rate heading into Q4 because, for the most part, Q4 is already reflected in our backlog.

Got you. That makes sense. Thanks a lot.

Thank you.

Thanks. Good morning, everybody.

Hi, Joe.

So, hey, Rich, just maybe going back to the supply chain discussion for a little bit, maybe a bigger picture question here. You have had some announcements from the government that they’re trying to ease the supply chain issues by going to like a 24x7 model at the ports. What I am hearing from you is that like you’re not really seeing much of an improvement at this point, but I want to make sure that like I am getting that correctly on the latest data point?

Yeah.

And then just very curious like, what would you do, if you had to do like proactively change policy decisions, what would you do to try to ease some of this burden?

Announcing 24/7 operations as if all the necessary employees and components are in place to implement that immediately is unrealistic. While the intent is good, we do not anticipate any significant changes in performance between now and the end of the year due to the complexity of the ecosystem. I am not an economist, but historically, our comments on transitory inflation and attributing it to used car prices have been overly simplistic. Corporates have managed inflation by adjusting prices, but that approach has its limitations. Additionally, considering other proposed agenda items that could lead to further inflation and port congestion, I question whether this strategy has been thoroughly considered.

Got it. Okay. That’s super helpful. And I guess, maybe just kind of thinking about this pricing, the backlog. Clearly, backlog is in great shape going into next year, maybe even beyond. I guess the concern in the market is your ability to make sure you can get pricing or re-price portions of the backlog to meet what the cost environment looks like and so as you kind of look at your backlog and your portfolio, are there any areas where there’s maybe a little bit more concern on potentially re-pricing the backlog or should we feel good going into 2022 that the margin on that backlog is in good shape?

We are not significantly changing the pricing of our backlog in any part of the group. In fact, we are doing the opposite. We are maintaining the pricing in the backlog, even if it impacts our margins, because we believe that preserving our strategic customer relationships and avoiding demand destruction is more beneficial than arguing over re-pricing the backlog. While we are adjusting prices on all new orders as the year progresses, the worst-case scenario would be a rolling credit unless one assumes that inflationary pressures will worsen going into 2022 compared to the current baseline.

Super helpful. Thank you.

Hi. Good morning, guys.

Hi, Josh.

Rich, just maybe first on some of these kind of bottlenecks that you guys are seeing. At what point, just based on what you can see in terms of what comes up next in the backlog or some sort of business mix, do you think you can get past that 2Q high watermark for what is able to get out the door? I imagine seasonality plays a role as well, but is that something that you have line of sight to right now and the way you guys are thinking about the next couple of quarters?

I guess, I am allowed to make one positive comment since we’re going to deconstruct all this. Remember that our margins are up quarter-to-quarter for the remaining here. Yeah, look, I mean, at the end of the day, Q3 was tough. I mean, for we still had COVID Delta going on at the time with absenteeism driven by that, which we’re largely behind. There’s nothing that’s fundamentally changed in our ability to manage output. It’s been a little bit of a struggle. I think that we were, I guess, a little bit disappointed on the labor equation. We had projected it to get materially better in Q3 and it got a little bit better as we exited Q3, but the first couple of months were quite difficult. So I am not overly concerned on our ability to get to high watermarks and we’ve got some relatively robust projections for revenue growth for 2022 and we’ve got the footprint to deliver it. So, again, unless we want to make an assumption that supply constraints deteriorate from here, which we don’t believe then I think that we’re positioned appropriately just by the fact that we’ve over ordered on the inventory side, at least we start off on the front foot.

Got it. And then just specifically on Pumps & Process Solutions. I mean, you guys have a mountain of backlog there. It doesn’t seem like the order intake is really slowing. I mean, just if you get down that backlog to a normal level and I don’t know what normal is anymore, but it seems like that business sort of has to grow double digits next year. I mean, a little early on 2022, but like that isn’t a long cycle business and you got more backlog than maybe you know what to do with, like what’s missing in that equation?

We previously discussed this. As we move into 2022, if we maintain a positive outlook on input costs, logistics, and the supply chain, we can expect backlogs to decrease. This will happen as lead times reduce, which might cause some panic, but there's no need for concern. Essentially, despite these constraints, having a backlog is beneficial as it provides us with significant visibility for the year ahead. We anticipate that the total backlog will diminish gradually, which is a positive sign. I won't be providing specific growth rates by segment for 2022, as mentioned earlier. However, our initial assessments suggest a constructive top-line outlook for the entire portfolio.

Got it. Works for me. Thanks, Rich.

Thanks. Good morning, everyone.

Hi, Nigel.

Hey. So, obviously, the backlogs, not so much the backlog, the book-to-bill ratios have been off the scale. So I understand the lead times impacting backlogs, but book-to-bill has been very strong now for the last three or four quarters. I really want you to address the question of what’s changed and what’s different about this recovery versus the last couple, which have been pretty anemic, so what do you think is driving such strength here? And then maybe just address, you talked about how you’re preordering or maybe buffering some of the components. To what extent do you think your customers are doing the same thing as well?

I think I previously answered this question, but we are currently conducting channel checks and have not found any elevated inventory levels of our products in any of our end markets. Order rates reflect the buildup of backlog, which remains high despite strong topline growth. The backlog will decrease over time, and I don’t want to reiterate that point. Regarding what is driving the current recovery, several factors come into play. From Dover's perspective, our portfolio has significantly changed over the years. It appears we are entering a capital expenditure cycle in many of our end markets. We mentioned refrigeration previously, and we are actively engaging with the energy sector. Additionally, our market exposure with the biopharma platform has evolved and cannot be directly compared to the past. Overall, we have expanded our capacity in growing markets, allowing us to have available products, and the profile of the end markets at Dover has noticeably shifted over the last five years.

Great. The CapEx cycle is what I was trying to highlight. You seem confident that we are in a CapEx cycle, which is encouraging. The portfolio slide was very informative, as your mergers and acquisitions may not catch much attention individually, but collectively they hold significant value. Are you open to continuing this pace with smaller, supplementary deals that are impactful when combined? Do you believe there could be one or two larger opportunities in the future?

We look at larger opportunities all the time. The problem with larger opportunities, the bigger the opportunity, the more it attracts in terms of interest, because of just scale and so pricing becomes difficult. If we look at where value has been created for Dover, historically, it’s these bolt-ons that use the network effect of Dover that have been high value returners. So, I don’t think we will ever stop doing the small ones, because I think that we’ve got a lot of conviction behind that process. But would we like to do some bigger ones? Sure, we would. We just need to find the appropriate priced deals out there.

That’s great. Thanks, Rich.

Thank you. Good morning, everyone.

Hi, Deane.

Good morning.

Hey. Maybe we will stick with M&A but on the divestiture side.

Okay.

And maybe just put in context the Unified Brand divestiture. Is it truly a one-off opportunistic divestiture or might it be the start of a pivot away from selectively in Refrigeration & Food Equipment?

We evaluate annually market structure participation by all of our operating companies. The fact of the matter is over the last three years to four years, the market structure in Foodservice Equipment has changed for a variety of reasons and we just did not believe that, Unified Brands within the Dover family was going to be able to extract the value and that it was more appropriately owned by someone that has the scale to participate in that structure.

That’s helpful. You’re not going to give specifics, I understand, but could you provide an update on the pipeline of potential divestitures and the pruning process? Where does that currently stand?

There’s not a lot, right? Like I said, we evaluate it annually. We’ve got a view of the value creation that’s embedded in each piece of the portfolio. But as a multi-industrial, if we were to get an inbound request where the value paid is in excess or equal to the value that we think that we could create then we would have to take a look at it. But right now we’re not actively looking at.

Got it. And then just last one, to go back on pricing.

Okay.

Rich, you talked about this during the quarter that you felt that a fourth price increase could actually start to result in some pushback demand destruction. You answered the question about not re-pricing backlog. But just broadly within the businesses, are you seeing that sort of price elasticity coming through where a fourth price increase might be problematic?

It depends, Deane. We have not been aggressive on re-pricing a backlog, because we take seriously our commitment when we accept an order that we accept to deliver against those commercial terms. But having said that, we have been sequentially moving on price primarily because of raw materials, not so much due to labor and supply chain.

That’s helpful. Thank you.

You’re welcome.