Dover Corp (DOV) — Q4 2021 Earnings Call Transcript

Thank you, Tani. Good morning, everyone, and thank you for joining our call. This call will be available on our website for playback through February 17, 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.

Thank you, Andrey, and good morning, everyone. Let's start on page three. We are thankful for the extraordinary efforts of our Dover team members which enabled us to deliver strong operating results amidst challenging conditions during 2021. We are also grateful to our customers who trusted us with their business while adapting their supply chains and business models to this rapidly changing and demanding environment. The resilience and creativity of our teams and the durability of our customer relationships were the key elements of our success this year, and we are committed to build upon those pillars in 2022, and mobilized to deliver another strong year of performance. All right, let's go on to the quarterly and full-year results. We delivered strong and better than expected results in the fourth quarter and the full-year, posting organic revenue growth of 11% and 15%, respectively. Our margin conversion for the year was strong, and we delivered segment margin increase of over 200 basis points for the year, driven by volume growth, productivity gains, and our center-led enterprise capabilities. We are satisfied with this accomplishment in the face of the well-chronicled input shortages, supply chain constraints, and COVID-driven quarantines and absenteeism that became increasingly challenging during the Omicron period of Q4. As we mentioned in the opening remarks, we battled through as best we could under the circumstances, but we cannot help but be very frustrated by the continuing guidance on mandates and deadlines. It seems, often, that we have learned very little in the past 24 months. We complemented our strong operational execution with value-creating organic and inorganic growth investments. We deployed $1.1 billion in nine highly strategic bolt-on acquisitions, and also completed the divestiture of our non-core food service equipment platform, on December 1. These investments advanced our deliberate strategy to expand into markets with secular growth opportunities. Recognizing the recent changes to our portfolio and to better reflect the nature of the markets and customers served by our businesses, as well as the contributions to revenue, growth, and profits, we have changed the name of our Fueling Solutions segment to Clean Energy and Fueling, and our Refrigeration and Food Equipment segment to Climate and Sustainability Technologies. Looking ahead to 2022, we enter the year with constructive optimism despite the ever-evolving operating environment and geopolitical clouds. We believe that growth conditions are still with us, but it is critical that policies are enacted or not enacted to continue this trajectory. A methodical monetary tightening is deemed necessary, and I agree that it is. I would urge caution on the pace of any policy decisions in the regulatory environment or taxation if one wants to preserve GDP expansion trajectory. As COVID and its effects subside, we desperately need policy pragmatism with a bias towards policies that foster economic growth. Demand conditions across the majority of the portfolio remain favorable as evidenced by our strong sustained bookings in the fourth quarter and throughout the year, with the book-to-bill each quarter above one, even with the aforementioned double-digit revenue growth. Our backlog, of $3.2 billion, is up 84% versus this time last year, which allows us to better plan our capacity, production, and inventory; a major benefit in today's constrained operating environment. While we expect these operational challenges in supply chain and labor availability to continue into early '22, we do expect operating conditions and price material spreads to improve as the year progresses. We believe we are well-positioned to deliver robust top line growth, margin expansion, and EPS accretion in 2022. We are therefore forecasting full-year revenue guidance of 7% to 9% organic growth, and adjusted EPS of $8.45 to $8.65 per share. I will skip slide four, which provides a more detailed overview of the results, so let's go on to slide five. Engineered Products revenue was up 16% organically in the quarter as demand remained favorable across all businesses. Vehicle Services posted a strong top line quarter, and market indicators remain positive. Environmental Services Group revenue was up year-over-year; with both bookings and backlog remain robust moving into 2022. Industrial Automation demand remained high, posting its strongest bookings quarter of the year, while deliveries were negatively impacted by output challenges in America and Europe. Aerospace and Defense posted solid year-over-year growth, with good momentum behind our recent Espy acquisition; the recovery of industrial winches continues with all end markets trending positive. Despite the heightened demand, margin performance in the segment remains negatively impacted by the combination of input cost inflation and input shortages, with notable impact from COVID-related absenteeism, particularly late in the quarter where we ran at over 20% rates, in some instances, at the height of Omicron. In the fourth quarter, Engineered Products was the only segment that had a negative price cost spread, largely driven by raw materials and logistics costs. This remains our most challenged segment in the current operating environment that we have line of sight to improve margin outlook as the price cost spread turns positive in 2022. Incremental margin conversion is expected to gain steam through the year as we cycle through inventory, and we begin shipping off a strong backlog that was priced in the second-half of 2021. Clean Energy & Fueling was down 4% organically in the quarter against a difficult comparable from 2020, when we saw the high watermark of EMV demand. Additionally, volume was constrained by our customers' construction, labor slowdown, and component shortages, as well as COVID absenteeism in Europe. Booking trends and backlog in the aboveground business remain constructive, based on early market feedback; and trajectory we believe that we have a winning product with the Anthem dispenser. Conversely, demand trends for belowground equipment have picked up in North America, and deliveries and vehicle wash continued their upward trend most notably in access terminal and controller business that we acquired a year ago. Our recent Clean Energy acquisitions had a minimal impact on our Q4 results. However, backlogs in these businesses are strong. Margins were down in the quarter, primarily due to the lower volumes, product mix, absenteeism-driven inefficiencies and lost fixed-cost absorption. Full-year results in this business were strong and better than we initially forecasted early in the year on robust growth, productivity and favorable mix. Sales in Imaging & Identification grew 3% organically. The core marketing and coding business was strong on comparable volume though a short of components and some order push outs reduced volumes in printers. Our serialization and brand management software business continues to grow ahead of expectations when we're working diligently to add additional resources here, as we integrate and scale the business. The digital textile business continues its gradual recovery and was up against a low bar comparable quarter, but it is still not recovered to pre-COVID levels. Q4 margins in Imaging & ID improved by 40 basis points year-over-year, as mix and price more than offset cost inflation and input availability issues. Full-year results were strong. The segment delivered 8% organic growth and 170 basis points of margin expansion are good volumes and productivity initiatives. Pumps & Process Solutions posted another strong quarter at 30% organic growth. Revenue for our CPC business was up double digits. We completed a clean room expansion project for this business in December, and anticipation of another strong growth year in 2022. Industrial and biopharma pumps were up on broad based end customer demand across all geographies. We are pleased with the performance of the flow meter business within Em-tec, which we acquired in 2020; its biopharma sales have doubled in 2021. Precision components were up as the business continues its recovery on improving demand in their broader industry exposure. Polymer Processing was up in the quarter due to strong demand for palletizers and gear pumps as well as strong order rates and recycling equipment and consumables, particularly in the U.S. and China. Margins expanded by a robust 740 basis points in the quarter and 790 basis points in the year on strong volumes, fixed cost absorption, favorable product mix and pricing. Top line results in Climate & Sustainability Technologies continue to be robust posting 13% organic growth. SWEP, our heat exchange business, capped off the year, posting all-time records in bookings, revenue and margin and carries a strong backlog into 2022. The business was strong across all geographies and end markets with particularly favorable demand in the EMEA for heat pumps, driven by regulatory requirements. We have been adding additional capacity in several geographies to meet forecasted future demand. Belvac, our provider production solutions for beverage packaging posted a revenue decline in the fourth quarter on difficult comparable driven by project timing. As we know, this business was up significantly in 2021, part of a multi-year secular shift toward more environmentally friendly aluminum cans with demand far exceeding the current installed capacity. Demand in our food retail business remains robust with elevated bookings and backlog levels. Our systems business in the U.S. and Europe continued its robust growth in deliveries and orders for natural CO2 refrigeration systems. Demand for door cases remained elevated as well. However, we continue to face labor constraints and subcomponent supply shortages that delayed shipments which necessitated intermittent production curtailments negatively impacting margins. We've instituted a number of price increases, which we expect to positively contribute to margins and conversion in 2022. Margins remained largely flat as the quarter as excellent operating performances swept, offset refrigeration headwinds despite the smaller revenue base. This segment demonstrated good progress in 2021, 22% of growth after a very modest 3% decline in 2020 and 230 basis points margin expansion despite multiple operational challenges as the year presented. With a strong backlog, we expect to continue robust progress in 2022. And I'll pass it on to Brad.

Thanks, Rich, and good morning everyone. Let's go to slide six. On the top is the Revenue Bridge. Our top line organic revenue increased by 11% in the quarter, with all segments, except Clean Energy & Fuel posting growth. FX was a 1% or $12 million headwind to the top line, M&A added $17 million net to the top line in the quarter, a product of $26 million from acquisitions partially offset by $9 million from the Unified Brands divestiture. The revenue breakdown by geography reflects strong growth in North America and Asia, and solid growth across Europe and the rest of the world. The U.S., our largest market posted 16% organic growth in the quarter on solid trading conditions and industrial segments, vehicle aftermarket, biopharma, and polymer processing. All of Asia was up 15% organically and growth in biopharma, industrial pumps, marketing, coding, and heat exchangers. China, which represents approximately half of our business in Asia, was up 17% organically in the quarter. Europe grew by 7% in the quarter on strong shipments and precision components, biopharma, industrial pumps, natural refrigerant systems, and heat exchangers for heat pumps, partially offset by order timing in sustainable beverage can making. Moving to the bottom of the page, bookings were up 22% organically in the quarter, reflecting continued broad-based momentum across the portfolio. Bookings helped drive our consolidated backlog to $3.2 billion, up 15% sequentially, inclusive of backlogs from our recent acquisitions. In the quarter, we saw organic growth across four of the five segments. Let's go to the earning bridges on slide seven. On the top chart, adjusting segment EBIT was up $47 million and adjusted EBIT margin improved 60 basis points as improved volumes continued productivity initiatives and strategic pricing offset input cost inflation and production stoppages. On the bottom of the chart, adjusted net earnings improved by $34 million as higher segment EBIT more than offset higher corporate expenses and higher taxes. Deal expenses primarily related to our clean energy acquisitions were $11 million in the quarter, representing approximately $0.06 of adjusted EPS headwind. The effective tax rate, excluding discrete tax benefits and gains on the sale of businesses was approximately 21.7% for the quarter compared to 21.1% in the prior year. Discrete tax benefits were $10.3 million for the quarter, or $2.1 million higher than 2020, for approximately $0.01 year over year EPS impact. After-tax right-sizing and other costs were $22 million in the quarter reflective of our ongoing productivity and right-sizing initiatives, including non-cash asset charges of approximately $16 million. Now on slide eight. In 2021, we generated $944 million of free cash flow, a slight increase over the prior year. Free cash flow conversion stands at 12% of revenue for the year despite an over $300 million investment in working capital. As we discussed last quarter, we remain focused on delivering against our customer's strong order rates, and we are carrying high inventory levels to ensure we can meet the current demand into next year. With that, I'm going to pass it back to Rich.

Okay, thanks, Brad. I'm on slide nine, which shows our progress in 2021 against the capital allocation priorities we outlined at our Investor Day in 2019. We have a strong collection of businesses, and our first priority is ensuring we can continue to win in the market through organic investments, supporting growth capacity, digitization, innovation, and productivity. We deployed over $170 million capital expenditure in 2021 towards growth and productivity enhancements, as well as maintenance of our asset base. Notably, we invested over $14 million in digital products and digital and e-commerce, which allow us to reach our goal of over $1 billion in e-commerce revenue last year with no touch by customer service. This represents over 10 times the volume we processed in 2018, and our 2020 goal is to double our 2021 volume. Our next priority is inorganic growth. Last year, we deployed $1.1 billion into nine highly synergistic bolt-on acquisitions including two larger deals Acme, and RegO, which we closed in December. All these acquisitions enhance our portfolio by increasing our exposure to markets with structural demand, growth outlook. Our pipeline and acquisition capacity remain strong and we expect to remain active on this front in 2022. Our third priority is to return capital to our shareholders that we again raised our dividend in 2021 as we have done for the past 66 years. Let's move to Slide 10, we provide more color and some of our organic investments. So, I won't go into the specifics any of these projects individually, but you'll see that our investments are substantial in size and represent a broad variety of productivity improvement and digitization initiatives as well as investments and capacity expansion, and new product development projects. These investments provide compelling financial returns and our proactive capacity expansions have allowed us to win share in the tight supply market. Slide 11 includes our current view of demand outlook and operational environment for 2022 by summit segment and how margin drivers are expected to trend over time and provides context of how we're thinking about our full-year guidance, which I'll get to shortly. We expect top line and engineered products to remain robust based on solid backlog and sustain high bookings across the business. All market indicators and vehicle aftermarket continue to remain positive and miles driven having fully recovered to pre-pandemic levels and used car prices remaining elevated. Orders for rough use trucks and software solutions are robust, with new order rates pushing well into the second-half of '22; momentum and industrial automation and industrial segments should continue on the back of the solid bookings quarter of all end markets contributing to growth aerospace and defense is expecting growth on positive order trends largely driven by Europe. We expect headwinds from negative cost to continue in the first-half of the year getting sequentially better as the year progresses. We expect this segment to be the only one with negative price cost spread in the first quarter. Input availability, mostly labor absenteeism, freeze from recent Omicron surge is expected to negatively impact production efficiency in the first quarter, but should subside for the balance of the year. All in we expect margins for the segment in the first-half of the year to largely mirror the second-half of '21, then to improve meaningfully for the full-year driven by volume leverage and pricing. We expect Clean Energy and fueling to post low single-digit organic growth for the full-year on solid growth and below ground vehicle wash and software solutions. Demand outlook and bookings of our recently acquired clean energy businesses are very robust and they are off to a good start. As you know, we don't adjust acquisition related amortization out of our adjusted segment earnings margins due to sizable acquisition related amortization charges from our recent deals in the segment, the operating margin will be compressed in the first quarter of 2022. Excluding about $40 million of incremental deal-related amortization expenses in '22, we expect full-year margin conversion to be in line with broader portfolio. Demand conditions in imaging and identification are expected to continue the positive trajectory into 2022. Our core marketing and coding business expect to maintain its steady GDP-like growth rate, serialization and brand protection software should contribute positively to robust bookings and backlog. Digital textile printing is recovering and is expected to take another year or two to reach pre-pandemic levels as apparel producers take a cautious stance with new capital outlays. We expect margin in the segment to continue to improve in 2022. Pumps and process solutions should see another year of solid performance. Demand for biopharma applications remains robust driven by demand for COVID vaccines, as well as growth in cell and gene therapies and expansion of MRNA technology to other applications. We are completing the second phase of our cleanroom expansions and automation to ensure we can keep up with demand and we have broken ground on the construction of a new facility. Additionally, our connector business is experiencing robust growth in new thermal applications such as data center and supercomputing and EV charging. Trading conditions and industrial pumps are strong driven by robust customer demand, plastics and polymers equipment business carries a solid backlog into 2022 with good market conditions and visibility especially in China, the U.S. and recycling solutions. Precision components continued its upward trajectory aided by OEM new builds and increasing activities at refineries and petrochemical plants. We expect margin performance to remain robust for the segment on volume growth, operational execution and positive price cost dynamics and climate and sustainability technologies we expect to post high single digit organic growth this year driven by its large backlog, and sustained elevated order rates, new orders and core food retail business have been healthy across product segments and the tailwinds from our leadership position and natural refrigerants are driving outsized growth of our CO2 systems business. As Omicron induced labor shortages abate in the first quarter, we expect volumes of door cases to recover with backlog stretching well into the second-half of the year. Our heat exchanger businesses positioned well on strong order rates across all geographies. Our Belvac packaging business continues to work through its record backlog. They are booked for 2022 and are taking orders for 2023. We expect to have our new R&D center and full can line completed in the first-half of the year. We expect margins to improve significantly in 2022, as improved volume leverage, positive price cost dynamics, productivity gains from our automation initiatives, and positive product and business mix should more than offset any lingering operational challenges related to component and labor shortages in the first quarter. All right, so before wrapping up and move into Q&A, let's try to square the circle here and sum up all the moving parts from our 2021 position to our full-year guidance. At the opening of this call, I said our results were better than expected. That was not a reference to external consensus estimates, but a comment about our operating margin performance versus our internal forecasts. Without the significant Omicron production and productivity losses which were not in our base forecast, we would have shipped more product in Q4 resulting in higher sales and cash flow, but lower consolidated margin on product mix. As a result of this, while we do get the benefit of carrying higher backlogs into 2022, we have not cleared as much higher cost inventory and have not realized all the benefits of past pricing actions embedded in that backlog. This will result in the calendar re-visitation of absolute earnings and earnings growth and especially segment operating margin being more back end loaded. An typical year as a result of this date delayed backlog for us. A few implications of this dynamic, number one we approved an operating margin expectation for Q1 and encourage those modeling quarterly forecasts to exercise the same level of prudence. Number two, it is a good sign of backlogs gradually deplete during the year as it will be driven by higher production performance as labor availability and supply chains improve. Lastly, if both these dynamics play out as forecasted, we can expect inventory levels to drop supporting increased operating cash flow in 2022. So let's move to slide 13, which hopefully removes the quarterly noise and gives us some view of post-pandemic full-year performance. Here we provide a bridge between our adjusted EPS in 2021 and 2022. We expect to generate double-digit EPS growth again this year driven by solid organic top line growth, much of which is currently in backlog as well as healthy full-year margin conversion and the positive impact from acquisition close in 2021. And so let's wrap up to Slide 14 to put our results and guide into the longer-term perspective. Our strategy has driven significant value creation for our shareholders over the last several years, as evidenced by the total shareholder return driven by underappreciated top line growth, cumulative margin expansion of 440 basis points, healthy cash flow generation and capital redeployment. We believe that our playbook offers us significant runway to continue delivering attractive cycle requirements over the coming years. And with that let us move to the Q&A.

Hey, good morning, everybody.

Hi, Scott.

Hi, Scott.

There was a lot of detail discussed, and I won't pretend I caught every single word. However, perhaps we can start by providing a bit more context. It seems that the issues with absenteeism and costs are still persisting into the first quarter. Are conditions improving, or are they just as challenging now as they were in the fourth quarter?

I think now that the federal mandate has been lifted, things are improving. The reduction of the quarantine period has made a difference. It's not as severe as it was at its worst in December, although there are still some lingering effects into January, but overall, it's better.

This cash flow guide is pretty solid. Does that imply there's going to be some work-down on working capital or are you at working capital levels that are kind of more, I would say, new normal given the supply chain messes out there or do you have some flush-out in '22?

Yes, we anticipated shipping that. It's uncertain if we would have been impacted by receivables, but I believe we expected a slight increase in inventory relative to revenue. For 2022, if everything goes as planned, which we expect it will, we will likely offset that inventory increase with the revenue growth for the year. Therefore, I expect our working capital performance in 2022 to improve compared to 2021.

Yes, I would just add I think we have a modest forecast of inventory drawdown. Depending on how the year progresses, there could be some incremental there.

Good luck, guys. Thank you.

Thanks.

Hi, good morning.

Good morning.

You might consider renaming the company to Dover Technologies or something similar, although it might not be the right time since growth is currently slowing. However, the idea of a name change is intriguing. Does this indicate that you will maintain the refrigeration segment?

Yes, it's in our forecast for 2022.

Okay.

Look, at the end of the day is we can't call it Food Equipment anymore since we disposed of the food equipment business. So, by and large, we had to rename it. The fact of the matter is, and I don't want to get cheeky about ESG-driven nomenclature here, is that the fastest growing portions of that segment are in sustainability technologies, it's SWEP, and our CO2 systems, and Belvac, which are all driven, we would argue, by a shift to meet ESG compliance, whether that's regulatory-driven or driven by other matters. So, I get it, it looks a little bit cheeky on our part, but it is what's growing within the portfolio.

Yes. And then, you mentioned, I think, asking us to use prudence in our modeling is a lot to ask, I think. Can you be a little more specific about kind of like first quarter, maybe even second quarter kind of dynamics on sales and margins?

Yes. I believe the first quarter will resemble the fourth quarter, with slight variations across different segments, and I expect it to be somewhat better than Q4. However, we will still face some of the challenges from Q4 in Q1, particularly due to the ongoing effects of absenteeism that we are still managing. Logistics costs have not decreased significantly, and more importantly, our inability to address backlog in Q4 has delayed the price-cost adjustments we anticipated. Nonetheless, all of this has been factored into our full-year projections.

Yes. And what do you mean by that as on an absolute basis, what you're talking about?

Yes, on an absolute basis.

Okay, great. Thanks a lot.

All right, thanks.

Hey, thanks. Good morning.

Good morning.

Hey. Just back on the new Clean Tech segment, whether or not refrigeration stays or goes, I wouldn't expect you to address today, Rich, necessarily. But do you actually see scope to do some additions in that area? You have legitimately transformed the Fueling segment, right, with some interesting deals. Are there kinds of logical extensions to SWEP or Belvac or other things that are adjacent to those businesses that could be in your M&A pipeline?

There are. But the beauty of those two businesses is the fact that they're so concentrated in terms of the supply base. So, there's not a lot of M&A you can really do. But if you look where we've been spending organic capital, we've actually been deploying proportionately quite a bit to SWEP and Belvac on organic capacity expansion. So, I'm not ruling M&A out because there are some interesting adjacencies around it, but what we've been doing is just investing behind growth. And I think that SWEP will be finishing, in 2022, an expansion in all four of the geographies they participate in, for example. And I think that we've put in 15 years worth of CapEx into Belvac over the last 18 months or so. So, it's more of an organic play, I think.

Okay. And just on the pumps business, I mean the results really are quite remarkable. To what extent would you say there's temporary COVID benefits running through biopharma or do you just see more of kind of a broader wave of investment and displacement of kind of, maybe, non-disposable technologies and other things driving that business? So, I guess the question is really just around the sustainability of these growth rates?

Yes, well, the growth rates are going to come down. I mean let's call a spade a spade here. I mean, everything gets clocked in for, what, 30% for the year, something like that. So, they're going to come down over time. And we don't have that kind of growth rate for that business embedded into our forecast for 2022. We also do not embed in our forecast any margin dilution because of COVID demand roll-off, because we think that the fundamental demand for those products is solid. And I would have hoped that Danaher could have done a better job talking about it since they are a market participant in the same space. We believe that the growth rate will come down as COVID demand begins to roll off. We don't envision it going negative in '22, nor do we think that margins are going to be negatively impacted.

And maybe just last one, just back on price cost. So, it sounds like the entire company should be price-cost positive in Q2. Is that correct? And when you're talking about price-cost I guess flipping into the positive, are we talking dollars, margins, or both?

The answer to the first question is yes, so the entire company in Q2. And yes again in terms of margin enhancement, especially in Engineered Products.

Great, thanks for the color.

Thanks.

Yes, good morning.

Hey, Andrew.

Hey. Just a question in terms of biopharma and just internal organic CapEx opportunities versus M&A, just how much growth can you drive organically by expanding biopharma capacity? And just thinking beyond COVID, do you think there is a real opportunity there?

I hope so since we're greenfielding a new facility for it right now, as we speak. Yes, look, I mean we were not able to keep up with customer demand in '21. I think that we did better than some of our competitors, meaning, I think, that we captured growth opportunities. But even with that capture, I think that we were, at certain points of the year disappointing our customers with our ability to serve. So, that was what drove the decision about expanding capacity. And I think, we greenfield the facility up in Minneapolis in 2019, it's sold out. So, that's why we're expanding there. And in our disposable pump business in Germany, we are bringing assembly operations with expansion to clean room in the United States for that particular product. So, our preferred path is inorganic investment to drive growth, because that's where our returns are the highest, but having, and as we've discussed many times, look, there's no secret that these are really interesting pieces of the market and they attract very high pricing. So, we're going to have to be selective on the M&A side. I think we have some interesting things that we're looking at for sure, but I think that we can do this simultaneously inorganic and organic.

Got you. And just a question on your business model, a, you're growing the e-commerce sales, I think over $1 billion, imagine you getting some sales efficiencies, but just a, how far can you take this model? And b, is there a generally greater structural ability to go direct to customers versus through distribution post-COVID? Thank you.

Let me address the second question first since it's simpler. No, we don’t plan to bypass distribution. Our goal in implementing e-commerce platforms focuses on a few aspects. While cost savings are a factor, the main advantage of transitioning to an e-commerce model is that it streamlines the Sales and Operations Planning process, improves inventory management, and centralizes pricing instead of having it dispersed globally. So, yes, there's some cost efficiency, but the greater benefit is operational over time, and we intend to continue selling through distribution.

Thank you.

Good morning, everyone. Rich, maybe you can give us a little more color into your confidence level that margin can turn more positive in DP. Do you need your productivity projects in ESG and VSG to complete before you get the margin turn? And then the business obviously is steel heavy. So, with steel rolling a bit here, does it give you more confidence in the turn into just a lag as some of the businesses backlog driven?

We were negative price cost for 2021 because of the catch up on the raw material versus price because the cycle time in terms of the inventory turns is just more difficult. Look putting the labor issues aside. On that alone, we've priced for raw materials inbound through the year, which we believe rolls positive in Q2 based on our forecast for production performance. And what that does, all things being equal is go back to historical operating margins that you would see from ESG and VSG back in the 2019 pre-COVID period as kind of expectation number one. The investments we're making are longer term investments that should be accretive to that '19 kind of benchmark, but we will get that over time. So, we may see some of that in '21 or in '22, but that's going to take some period of time. We're re-outfitting both of the main plants for those businesses.

Got it. And then, I'm going to ask you the old bookings question in the sense that bookings did not slow as you thought. I think we all understand that bookings will slow, but do you see an environment at least right now where the high level of bookings you're seeing is relatively sustainable? And how do we think about whether there is conservatism in your new '22 organic guide versus the backlog that's up obviously over 80%?

Nothing like going first, I bet that our revenue guide is not conservative when all is said and done here, but I'll take your question anyway. Look, bookings are going to slow. We have businesses that are relatively short cycle that are booking into Q3. It's just inexplicable to me that there's any need for our customers to go beyond that point right now. I think we're going to get hit, and it better happen because if it doesn't, that means supply chain issues are not resolving themselves in '22, and we expect that to get progressively better. So, strangely, it's going to be a good thing if bookings decline in '22, relative to the rate we saw in '21.

Very helpful. Thanks, Rich.

Thanks.

Yes. Thank you. Just sort of sticking with this theme on supply chain, I'm curious as to what you're seeing as far as your own components and your own purchases in terms of availability. I would imagine that, EP is probably the area where you're seeing the biggest challenge, but I'm kind of curious, one how that's changing into some of the other segments that might be experiencing this as well.

I believe no segment is completely unaffected. If you consider the nature of our products, those related to capital goods have significant exposure to raw materials and involve considerable complexity due to their size and dimensions. This is different from a product like a connector, which is primarily limited by capacity and some logistical issues. The supply chain challenges are particularly pronounced in engineered products, although this does not completely exclude end-to-end refrigeration, as its business model is closely linked to the dynamics in engineered products. The situation is improving compared to previous periods, though we anticipated a quicker decline in logistics costs. While some progress is visible, we hope to see further improvement. Our working capital reflects that we have accumulated substantial inventory, partly to manage production interruptions that have been costly. We expect a significant reduction in production curtailments compared to 2021 and 2022, and for logistics and supply chain conditions to improve gradually throughout the year. These are the fundamental assumptions we are working with.

Okay. But it sounds like you're seeing some of this already. It's not just aspirational hoping for it. Some of this is getting a little bit better.

We can look at the futures for raw materials, steel, and other inputs. We can purchase those materials at lower prices than what we currently have in our inventory.

And related to that, my final question here, how do you think about pricing beyond 2022, because obviously, you have raised prices because of raw material inflation? Does that imply that you're going to have to give pricing back in '23 or not?

That's a good question. And our expectation is we did not re-price our backlog, as it was built to the detriment of our margins, nor will we re-price our backlog the other way as input costs come down.

Thanks. Good morning, everybody.

Hi, Joe.

So, Rich, maybe I know you guys don't typically give margins by segment; you talked about the climate and sustainability technology segment that's seeing significant margin progress this year. Historically you have had that kind of mid-teen target out there for the retail part of your business. Just curious like any other color that you can kind of give us on how much progress if you think you'll make in 2022. And then also just unified brands, was that margin diluted to your business, or no that that came out, that's coming out this year too?

That had a negative impact on the overall business margins. It would have positively contributed to the fourth quarter, I believe, if it had remained in place.

It's a small impact.

Yes, there will be a small impact overall. We expect to achieve our margin target for the refrigeration business in 2022, which is included in the forecast. We anticipate strong growth from both SWEP and Belvac in 2022, and all of that revenue will contribute positively to the margin.

That's impressive. To follow up, staying in this segment, the backlog you're building is remarkable, right? It's $2.3 billion, and I don't think anyone has forecasts close to that level of revenue for the upcoming years. I'm trying to grasp how to evaluate this segment on a multiyear basis from a top-line perspective based on your current developments.

Yes. Well, look, on the refrigeration business, conceivably, we're going to get to the point where we'll cap off the growth in traditional door case, and then put all of our muscle behind CO2. CO2 is the part that's inflecting right now, and we'll probably have more color on that once we get into the mid '22 of what we think that can do going forward. Belvac is clearly going to be a story of building the backlog. So, we can just watch that as we progress through the year, and I think we'll do as we go through the year, what we've done in the past and break Belvac backlog away from the segments, so you can see it. And then Swep, look, we've been doing very, very well in Europe on heat pump technology. We expect that technology to be brought to the U.S. And as part of that, that's why we're expanding capacity today in advance of that. So, to the extent that we're deploying the capital means that we expect that business to continue its growth trajectory over time.

Got it. That's super helpful. Thank you, Brad.

Thanks.

Good morning, all. Thank you.

Good morning.

Hey, just wanted to come back to the internal manufacturing inefficiencies that took place in '21. Obviously, just given the environment those, you know, expected, but can you isolate those headwinds versus the raw maths and logistic inflation that you saw? I would imagine there's some non-repeat there, just trying to get a sense as to what that number looks like?

Yes, that's a significant figure. It heavily influences the margin impact on our engineered products. Regarding the RFP, I can't recall the specific name at the moment, but it's important. We believe we can increase profits in 2022 as much as we can because we faced substantial challenges from reducing production, which affects fixed cost absorption rather than the price-cost relationship. This has resulted in a loss of fixed cost absorption.

Yes. Well, it's meaningful on the top line and on the earnings line. And I think Andrey can walk through that with you.

Okay, great. I'm trying to understand the 30% incremental growth along with the positive price cost dynamic. It seems like there might be some adjustments in the guidance. Regarding e-commerce, I want to know the timeframe you set to double those sales. Given the lower cost to serve, what additional margin should we anticipate as that figure increases?

We achieved a billion in 2021, and our goal is to reach $2 billion in 2022. As I mentioned earlier, this is not really about cutting costs; the real advantage lies in our overall operations. This includes inventory management, centralized pricing, dynamic pricing, and SKU management. You should view this as a portfolio strategy, focusing on leveraging synergies across the portfolio through these initiatives rather than analyzing it by individual operating companies or segments.

Okay, got it. Thanks a lot. Best of luck.

Thanks.