Dover Corp (DOV) — Q2 2022 Earnings Call Transcript

Thank you. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through August 11. The replay link of the webcast will be archived for three months. Dover provides non-GAAP information. 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.

Thanks, Jack. Good morning, everyone. Let's begin with the performance highlights on Slide three. Our team achieved a strong second quarter with record quarterly revenue and sequential year-over-year earnings growth. We saw a consolidated organic revenue growth of 7% this quarter as our businesses continued to leverage strong backlogs and effective pricing strategies. We believe our ability to deliver and provide necessary capacity in today's challenging environment has resulted in significant share gains across various markets, which bodes well for our ongoing growth. Component shortages and COVID lockdowns in China did have a negative effect on shipping volumes and, consequently, efficiency and fixed cost absorption in several areas during the period. However, despite these challenges and foreign exchange headwinds, absolute segment profit grew year-over-year, and operating margin improved sequentially this quarter, aided by cost controls, favorable volume, and significantly better price-cost dynamics. Our solid balance sheet offers us the flexibility for value-creating capital allocation initiatives. We are investing in capacity expansions and productivity improvements across many of our operating companies to seize revenue growth opportunities, gain market share, and enhance operational performance. The recently announced Malema acquisition, which closed on July 1, will bolster our biopharma business, and we remain on the lookout for attractive bolt-on acquisitions. Additionally, we repurchased $85 million in shares during the second quarter and will continue to actively assess capital deployment options for the remainder of the year. Our strong backlog, positive demand outlook, and effective execution strategy position us well to achieve growth in revenue and earnings amidst an increasingly uncertain macroeconomic environment. We are maintaining our 2022 adjusted full-year guidance of $8.45 to $8.65 per share. I’ll skip slide four, which outlines the detailed quarterly results, and move on to Slide five to discuss segment performance. Revenue from engineered products increased by 19% organically this quarter, driven by broad-based strength across major geographies and effective pricing actions. Margins rose by 130 basis points sequentially, and we anticipate this trend will continue through the second half as the price-cost spread advances. Clean Energy and Fueling volumes are bolstered by strong performance in Clean Energy components, vehicle wash, and below-ground fueling components, although we expect a decline in EMV-related demand in North America compared to the same quarter last year. Year-over-year margins decreased due to lower volumes and constrained inputs, as well as a mix shift. However, we saw a significant sequential margin improvement of 410 basis points compared to last quarter, attributed to better cost dynamics and product mix. In Imaging & ID, volumes in our core marketing and coding business faced constraints due to shortages in electronics and other inputs, along with COVID lockdowns in China, which offset growth in our serialization and brand management software sectors. Foreign exchange poses a significant negative impact on absolute revenue profits in this segment due to its substantial international revenue base. Margins in Imaging & ID for Q2 were affected by lower volumes and production stoppages in Asia but improved sequentially. The team has effectively managed costs and sourced alternative suppliers to ease supply chain constraints, and we are optimistic about achieving good margin conversion in the second half. Pumps and Process Solutions reported 7% organic growth, driven by strong double-digit growth in our core non-COVID biopharma business, along with robust growth in medical and thermal connectors, industrial pumps, polymer processing, and precision components. Operating margin for the quarter remained strong at over 31%, even with a shift towards industrial components. Top-line performance and alignment in sustainability technologies continue to be solid, achieving 11% organic growth backed by strong volume in heat exchangers and beverage can manufacturing, as well as pricing across all businesses. Volumes in food retail faced challenges due to supply chain issues, negatively impacting cost efficiency, resulting in shipments being pushed to Q4. Comparable and sequential margins increased in the quarter, supported by a better mix and price costs, though somewhat tempered by production efficiencies and input shortages. As you can see, we are progressing towards our mid-teens operating margin target in this segment. I will now hand it over to Brad.

Thanks, Rich. Good morning, everyone. Let's go to Slide six. The top bridge shows our organic revenue growth of 7% driven by increases in three of our five segments. FX was substantial at 4% or $74 million headwind to our revenue growth and is also to our profitability, resulting in $0.08 negative EPS in the quarter. We expect FX to remain a headwind for the year compared to our prior expectations. All changes in foreign currency translations from April until today are estimated to have a full-year 2022 impact of an incremental $0.10. M&A contributed $49 million to the top line in the quarter, a product of $84 million from acquisitions partially offset by $34 million from Unified Brands divestiture. We saw organic growth across the U.S. and Europe; Asia was flat organically in the quarter as China was down 4%, driven principally by COVID lockdowns, offset by growth in other parts of the region. Our businesses in China have resumed operations, and we are currently seeing recovery in production and regionally sourced components. On the bottom of the chart, bookings were down year-over-year primarily due to foreign exchange and a one-off $74 million debooking in beverage can making due to customer financing limitations. Likewise, our backlog was negatively impacted by the aforementioned debooking, as well as a negative impact from FX. Let's go to the earnings bridges on Slide seven. Before I get into the charts, I want to remind everyone we now exclude the impact of acquisition amortization accounting from our segment earnings, which avoids deal-related noise quarter-to-quarter and better aligns the basis of our segment earnings presentation with our consolidated adjusted EPS. This change had no impact on our GAAP earnings or adjusted EPS. Now to the charts. Segment earnings were up $9 million in the quarter, on improved volumes and price costs, though partially offset by supply chain constraints and foreign exchange headwinds. Segment margins were down 80 basis points. Adjusted net earnings improved by $10 million driven by higher segment earnings and favorable corporate expenses partially offset by higher taxes. The effective tax rate excluding discrete tax benefits was approximately 21.5% for the quarter comparable to the prior year period. Discrete tax benefits were lower than the prior year at $4 million in the quarter or approximately $0.03 of EPS. This compares to discrete tax benefits of $0.08 in the second quarter of 2021. We expect our back-half tax rate to be in the range of 21% to 22%. Our cash flow statement is on slide eight. Free cash flow declined in the first half of the year driven by working capital investments in inventory necessitated by the high backlog. Supply chain constraints, exacerbated by input shortages, prevented the completion of some work in process inventory in the quarter, as well as higher receivable balances on growing sales. The quarter also included a $43 million tax payment related to the sale of Unified Brands. Capital expenditures were up year-over-year and are principally in support of our robust growth expectations across several businesses. Free cash flow was 6% of revenue in the quarter and would have been 8% excluding the UB tax payment. We expect cash conversion to improve in the second half of the year more in line with typical cash conversion seasonality in our businesses, driven by earnings conversion and inventory reductions. With that, I'm going to turn it back to Rich.

Right. Thanks, Brad. Let's go to Slide nine. This slide is our current view of the demand outlook, operational environment, and margin drivers for the remainder of 2022 by segments. We expect top line and engineered products to remain robust based on elevated backlogs and implemented price increases. Vehicle services continue to see a constructive demand environment across all geographies with particular strength in North America. Demand for refuse collection vehicles and parts remains very strong, and our connected collections digital businesses are significantly outperforming expectations. Our backlog includes fully implemented price actions that support the projected recovery in margins. We expect volume productivity and improved price-cost spread to be positive drivers of earnings accretion and margin improvement in the second half of the year. In Clean Energy and fueling, we expect to see robust growth in the second half of the year after a roughly flat first half. We continue to see solid demand in North America for below-ground retail fueling, fuel transport vehicle wash, and software solutions. Our acquisitions in clean energy components continue to outperform their year 1 acquisition models, and we have already begun to deploy capital in these businesses to expand capacity and improve productivity. We expect margin performance to improve in the second half on stronger volumes and mix, which will drive improved full year margins in this segment. We expect volumes in Imaging & ID to improve as component shortages ease with China recovering from second quarter COVID shutdowns. We continue to work to identify alternative electronics providers to alleviate component bottlenecks going forward, and we're beginning to see some inquiries and improved order rates for large scale printers and digital textile printing, showing positive developments in an industry that has experienced prolonged recovery. We expect margins to improve in the second half and better volume and cost containment while keeping a close eye on FX. In Pumps & Process Solutions, activity in industrial pumps remains solid; polymer processing has booked several big projects to lay the foundation for a very strong second half. We recently received our single largest order ever for the business in early July. Precision Components continues its upward trajectory in both bearings and compressor components across all geographies as investments in the energy sector pick up. We expect the current below-normal demand trend in biopharma to continue for the balance of the year as biopharma manufacturers finish transitioning their R&D pipelines and production systems from COVID-related businesses to other growing biologic therapies. We expect Climate & Sustainability Technologies to post double-digit organic growth this year driven by its large backlog and pricing initiatives. Demand remains robust across all lines in food retail, while input shortages have hampered food retail shipments but are expected to improve, resulting in a catch-up of deferred shipments into the second half of the year. Our heat exchanger business is positioned well with strong order rates across all geographies and end markets, particularly in the European heat pump business. In Belvac's beverage packing equipment business, we continue to work through its record backlog. We have already been awarded new projects in Q3 to materially offset the debooking in Q2. We expect margins to improve year-over-year on volume leverage and positive price-cost dynamics and normalizing supply chains. Let's go to Slide 10. I presented this slide at a recent conference, but it bears repeating as not everyone attended the event and the topic continues to be actively debated. There is a view that booking rates are the sole predictor of demand and revenue growth, and negative year-over-year bookings on top of a record 2021 are somehow spelling trouble. None of us know what the future holds, especially in the current environment. Let's level set on the basics here. First, if you look at our revenue and bookings, they've historically been correlated. But because of the demand wave coming out of the pandemic, coupled with extended lead times from supply chain issues and some changes in product mix, our bookings jumped in 2021 to $9.4 billion, well ahead of our revenue last year and our guide for 2022 revenue. That resulted in backlogs that are at record highs, roughly double where they have normally been on a 12-month revenue basis. That, over time, should come down, which is healthy because it means lead times are coming out, and global supply chains are improving. Our backlog is sufficient to feed revenue growth for a significant period. And it's worth noting that our backlogs halfway through the year are still higher than they were at the beginning of the year. Despite a decline in bookings, our book-to-bill ratio so far this year is still above one and in line with historical trends. Our current booking and backlog trends should position us to enter 2023 on solid footing. Let's move to slide 11. We show historical first half versus the second half margin performance. Historically, Dover has generated higher margins in the second half of the year. Last year was an anomaly as input inflation and supply chain constraints and COVID shutdowns hit the second half. Our sequential margin trajectory is upward and progressing largely as expected, and we remain confident about the positive second half margin dynamics in line with historical seasonality, although I would note that Q4 will contribute more to absolute profits than normal on backlog and order timing as we liquidate a large work in progress balances in inventory. Make no mistake; we remain concerned with the inflation trajectory and general macro backdrop and the different demand scenarios that are possible in 2023. We have a playbook to act decisively to adapt from a cost structure and working capital perspective to different demand conditions. But sitting here today, looking at our backlog, significant portions of our portfolio were sold out for 2022. So we would expect the order rates to inflect positively as we go into the second half. We have levers that are not demand-dependent. We have positive contributions from our organic capital deployment and productivity initiatives in our four enterprise pillar efforts that will positively contribute to next year's earnings. We also have very interesting and underappreciated portions of our portfolio where secular demand growth will outperform the broader industrial market. In closing, I'd like to thank my colleagues around the globe for their continued dedication to strong performance in a demanding operating environment. And Jack, I'll hand it back to you, and we can get to the Q&A.

Hi, guys good morning. Just you mentioned FX impact in the quarter $0.08, what was it versus expectations? And what does the new guide assume for FX impact on an EPS basis versus the previous guide?

Well, okay, I'll take that. Within the quarter, the impact was about $0.02 against our expectations. I said for the full year, from here forward, it would be about $0.10. And I think you're asking me specifically what kind of forecast rate we are using. I could say we're using a euro of about $1.05. Today, it's trading at about $1.02. So maybe the headwind is a little bit higher. But we'll see what happens now moving forward, especially with the ECB raising rates.

Got you. And just another question on commodities. Commodities are broadly down from their peak. So how should we think about the supply chain getting better into the second half? How should we consider that affecting Dover COGS? Is there a 6-month lag or a 12-month lag?

On the commodity side, we get the majority of it in the second half, right? So all of that has been in inventory for some period of time. What we've been waiting for is the pricing to roll forward. So we've seen a significant improvement in Q2. And the expectation is on the backlog. The raw materials being fully priced in the back half of the year and those businesses that are exposed to raw materials, and that's why we're confident about the margin accretion potential.

And is there any sort of incremental margin just as FX creates some incremental headwinds? Is there an incremental margin of safety from commodity decline, as we think about towards exiting the year?

That's too complicated for me, Andrew. Over the past few weeks, we've observed a significant drop in the value of the euro against the dollar, and we've been considering if that trend will continue. It's quite severe. As Brad noted, there has been some recovery and discussion from the ECB about increasing interest rates to mitigate that effect. However, we will need to monitor the situation. Also, keep in mind that we will convert at average rates, so it's important to be cautious when applying spot rates to our calculations for the second half of the year.

But I would just add that as it relates to price commodities. I feel good about the fact that all of our price actions are directly enacted going into this back half. And so we'll see what happens with commodities. I mean, that's basically all we can say is, we'll see.

Rich, Brad, always a pleasure. Thanks.

Thanks.

Hello Rich Tobin and Brad.

Jeff.

Hey just two from me. First, Rich, just on the Belvac situation. We tend to think of the customers, Coke, Pepsi, Crown, Ball, etc. So a little surprised to hear if somebody had a financing issue. Could you just elaborate a little bit more on what happened there? And then maybe the backfilling you're talking about is somebody stepping in and taking those slots?

Yes. Capacity has been constrained in can-making for three years now, which has driven a lot of capital investment by can makers. However, we've also seen many companies choose to vertically integrate instead of depending on can makers. There was a specific project in Eastern Europe that was part of this vertical integration effort, but due to changes in the equity markets and financing conditions, the order was canceled. That said, we received a $40 million order last week, which we had to debook. This situation does not affect our revenue and earnings for 2022, as it was actually intended for a project in 2023.

Right. Interesting. And then just on the trajectory for the year here, I mean, clearly what you're saying about price-cost and trends would indicate a sequential improvement in Q3 versus Q2, but you also are signaling a little bit more Q4 waiting? Could you just give us a little more color on how you expect the back half to play out here just to make sure we're all properly triangulated?

Sure. At the end of the day, this quarter required us to meet a high profitability bar since the demerger. We were particularly concerned about this quarter, but we managed to meet our targets. Regarding the seasonality of the latter part of the year, as illustrated in our presentation, I want to caution that due to our ongoing work in process, I expect this to persist into Q3. This means we will likely push out more in Q4 than we normally do. Historically, we would operate at full capacity and seek cash in Q4. However, supply chain issues are not resolving quickly enough to significantly reduce our backlog and work in process in Q3, so that will carry over into Q4. This is factored into our full-year forecast. I want to note that while we don’t focus heavily on quarterly results, we anticipate a higher proportion of our earnings in Q4 compared to past trends.

Great. Thanks a lot.

Welcome.

Hey, good morning, guys.

Hey Scott.

Sharp move we saw on FX. I mean, is there a point where there's a demand destruction challenge? Is there perhaps maybe framing how much of your product is moving from dollar-based regions to non-dollar-based regions and be helpful in that regard? But is there a certain point where you start to get nervous?

I am more concerned about the European macroeconomic situation than I am about foreign exchange rates. We hardly ship anything from the U.S. to Europe, so the Euro-dollar issue doesn't significantly impact us. While I don't believe we've gained any major competitive edge from a lower dollar against the euro over time, I don't view foreign exchange as a demand problem. Rather, the European macroeconomic conditions pose more of an issue. We aren't seeing the repercussions of this today, but we're aware that the situation isn't ideal, especially with current energy costs and other related factors.

And how about emerging markets, where perhaps they have to buy in U.S. dollars, the product?

We have a strong presence in four regions. The products we sell in emerging markets are unique, as there is currently no Asian competitor for Maag, for instance. We may face some pricing pressure in the future if the dollar remains strong against emerging market currencies. However, for now, I believe that with our larger capital goods offerings, such as Maag and Belvac, we can manage this situation.

Okay, and then just quickly last, the printing ID business, any of your consumer goods customers, delaying orders or talking about any slowdown demand there?

No, not really. I mean, we just had some operational problems. We had to shut our operations down in China for a period of time during the lockdown, and we were caught up in some of the supply chain on electronics components there that we ended the quarter with a decent improvement. So I would expect that at least on the printer portion of the business, we'll catch up in the second half. We do not see a deterioration on the consumable side.

I'd say we lost in that segment about four points of growth because of the shutdowns in China and the component supplies within that business, which catches up in the back half.

Okay. Thank you, Brad. Thanks, Rich. Take care.

Thanks.

Thanks. Good morning, everyone. Rich, can we start with pricing expectations? For the remainder of the year, I believe you mentioned a six-point price increase this quarter. There's also a lot of conversation about base metal prices decreasing. Will companies need to reduce prices as commodity prices fall? Could you provide some context on how this will impact your business?

It's going to be an interesting situation. Firstly, price-cost dynamics will shift positively in the second half; all our pricing for the year is already set. Any pricing decisions we make now are more related to 2023. The costs of raw materials are decreasing. We haven't adjusted our backlog for the negative impacts, and we don’t plan to adjust it for any positive changes either. We've been actively discussing this with our customers for a while. If prices have to lower due to decreasing raw material costs, this could actually be beneficial for margins. Looking at price-cost on a rolling 12-month basis, we faced a significant challenge in the second half of last year through the first quarter of this year, but we can expect a favorable trend for the remainder of the year, which will likely be neutral overall for capital goods in the long term. The timing for liquidating the backlog affects this spread. While lower prices may impact revenue negatively, they could enhance operating margins.

And maybe this kind of following up on the piece of the business, it's not backlog sensitive. So most of your business, right, this short cycle piece, would you expect to be this, in a deflationary backdrop, dollar neutral, would you be dollar positive? I’m just trying to get a sense when you get to keep some of it as we kind of progress over the next 12 months.

Yes, on the short cycle portion of the business, I wouldn't expect that there's not that dynamic of input cost tied to market pricing. I mean, that's really the capital goods portion of the business, both us ourselves and our customers. That is an ongoing dialogue just because of the proportionality of the input costs. And you can see what the diamond is on the raw material side and the short cycle portion of the business. There is not that direct link. So I mean, barring the competitive environment becoming incredibly aggressive in 2023, I would expect, it's our intention to keep the pricing that we've laid in.

Got it. No, that's helpful. If I could just squeeze one more in. Just the fund process margins finally saw some degradation this quarter, you guys have been kind of calling out mix in that business for the last couple of quarters. Is this kind of like the right new level, this like 31% type margin? Do you expect further degradation in the coming quarters?

Yes. Look, I mean, let's not get into quarter-to-quarter performance. I think that we've been clear over the last 18 months or so that 30% margin is pretty much the new normal. There will be some volatility quarter by quarter, clearly, based on mix. And it's not all bad at the end of the day. I think on the biopharma side, the demand as our customers convert is going to be slow, as I said, in the second half of the year. We believe in terms of our ability to retain our share of that marketplace is absolutely solid; we're specified in a significant amount of our customer base. So it's just as biopharma transitions. And remember, too, there's other portions of that business that are dilutive to that margin. So when we post organic growth numbers, I believe it was 7% more or less in DPS for the quarter. A lot of that growth was from the industrial component side, which is dilutive to that margin. We don't try to manage segment margin. Basically, we're pushing all these companies as much as we can. So if we have dilutive mix, that's not necessarily a bad thing. We want every piece of that segment to grow over time. And we're actually quite pleased with the performance of Maag. As I mentioned, that backlog is going up well into '23 now and the turnaround that we're seeing in Precision Components, which is levered to the energy sector.

Makes sense. Thanks, guys.

Hey, guys, good morning. Just to be clear, on kind of these price-cost questions, I think, I think Andrew was trying to ask about when you guys would see deflation given where commodity prices are today. I interpret your answer as it's not like you're seeing it in the second half; that's more price catching up with the inflation. So at what point would you see lower steel and lower copper run through your revenue line item? Six months, nine months, 12 months? Like what's the timing on that? Just to be clear on that answer?

Sure. I guess now we're going to go operating company by operating. I'll give you two examples. I mean, I think in Maag, because that has got an inflator deflator that probably rolls every 90 days or quarterly, you would begin to see that a little earlier. Its net neutral, in Pumps & Process Solutions in terms of its operating margin or its performance. And the other capital goods side specifically on ESG, we wouldn't see that until mid-next year, probably based on backlogs.

Right. So kind of blended for the cap goods businesses, 6 months?

Yes.

Okay. Yes. So beginning to give next year. So you're not seeing that in this year as a point, and that's mostly price catching, right?

I think it's completely manageable. I mean, the issue is going to be what happens to the competitive environment going into 2023, and we'll see there depending on what demand looks like. For us, I like where we stand in terms of our competitive stacks, right? The vast majority of our business have very few global competitors, and I don't expect to see if demand comes down, then you've got some significant headwinds in terms of the pricing environment from a competitive point of view outside of what's happening in raw materials.

Got it. And then just a question on orders. Your reported orders, including the backlog cancellation. So are you saying that those orders next in the third or just the run rate for the second half that those will actually be up sequentially because of that impact of the $75 million or whatever it is, or maybe you can just follow up on what sequential orders.

What I can tell you is that our benchmark for margin, operating profit, and order volume was set in Q2. We have been signaling for a year that this trend cannot last indefinitely, and that orders will decrease. However, if you noticed, our backlog has remained steady. I think what Brad was emphasizing is the need for caution moving forward, as foreign exchange affects revenue and profit translation, as well as balance sheets. Again, I'm not concerned about our orders; we have a significant portion of our portfolio that is sold out for the year.

Right. So can book-to-bill be above 1 on a reported basis for the next couple of quarters?

Can it be? Yes.

Okay. Is that in your forecast? Anything can happen here.

Honestly, we don't measure projected book-to-bill. We have revenue and earnings forecasts, but we aren't focused on counting future orders.

Except us.

Yes. Well, we had a discussion around here about book-to-bill orders and backlog, whether that's too much or too much. But at the end of the day, look, this notion that order rates coming down is somehow a precursor of 2023 demand. I think I'd be very careful about that.

Okay, thanks.

You're welcome.

Good morning, guys.

Good morning.

Rich, maybe just to follow up on that. Can you give us a little more color into the puts and takes of your revenue guidance for the year? I know we just talked about currency and length, but you actually raised your organic growth guide for the year despite lowering expectations a little bit in DII and DPS. Does your higher organic growth forecast come from more momentum in specific businesses, DP, DCF? Or is it more confidence in supply chain easing?

Well, let's see. First, the second half of the year presents an easier comparison. I want to emphasize that Q2 was the challenging benchmark, and we actually saw growth over that period. If we examine the growth we achieved in Q2, it was the highest target we had to meet. Looking at the second half of last year in terms of absolute growth, we appear to be in a solid position. Brad discussed our estimates regarding foreign exchange, and like everyone else, we will need to monitor that throughout the year. Regarding our cash flow, it has been negatively affected mainly by inventory, particularly a significant amount of raw materials and work in progress rather than finished goods. We plan to convert a substantial portion of that, which entails selling it, impacting our backlog and ultimately our revenue. We intend to work diligently to reduce our inventory position before the year ends, which should improve cash flow moving forward. The key factor to watch will be our shipments in December and whether they get delayed in receivables, but that's just a timing difference. Our main focus is on clearing the work in progress from inventory, which will help address the raw materials we have on hand.

And then, Rich, or Brad, maybe I can follow up on the cash flow. Obviously, you had your initial cash flow guide out there, 13% to 15% of sales. I know cash flow improved sequentially. But as you were just talking about, Rich, seems pretty back-end loaded. Any update on sort of that original guidance or how to think about cash flow conversion over the next couple of quarters?

I think everything remains the same regarding our cash flow dynamic. Our earnings are increasing for the year, which is a good sign. We've increased our inventory due to various supply chain challenges. I'm not concerned since our inventory levels in relation to our backlog are in a stable position. We plan to manage a significant portion of our inventory during the second half of the year. The timing of payables and receivables will be important. The main point of attention will be the receivables balance at year-end, but there’s no crisis brewing after January 31. I’m not suggesting there’s a problem with our guidance, and we’re committed to achieving it. Overall, from a cash flow perspective, our situation remains unchanged compared to the past, and our earnings are on the rise.

Appreciate it, Rich.

You're welcome, Andy.

Hey good morning, guys. Rich, you mentioned there, I apologize I jumped on the call a couple of minutes late. Watching Europe maybe a little bit more closely than kind of worrying about macro at large. Anything in terms of progression through the quarter order rates, mix of business? I know there's a couple of particularly economically sensitive businesses there. I would think the retail fueling when you $8 a gallon gas maybe isn't feeling awesome. But anything there that you feel a need to point out?

No, nothing unusual. Europe is likely more reliant on exports than NAFTA is for us. The proportionality of Europe is actually lower than it is for NAFTA, which is very high proportionately. So there is some buffer there. I previously mentioned that Maag has the largest order from a European company that's shipping to Greater Asia, and that business remains strong. It's hard to say right now. We don't see much negativity or any cancellations of orders in our backlog in Europe at the moment. It's more about the concerns expressed by our customers and employees regarding the current situation. But for now, we don’t observe anything suggesting a downturn. We are preparing for different scenarios in case Europe encounters issues. We've established a playbook to protect our operating margins under various demand scenarios, and we demonstrated that in 2020. We would apply the same strategy again. I wish I could provide more specific insights. Currently, everyone is anxious about the broader economic situation in Europe, but we don’t see it escalating into a significantly negative situation yet.

Got it. That's helpful. And then I guess maybe some out a little bit more strategically. You've been talking about near-shoring or kind of broader supply chain investment by the industrial world for a while now. At the same time, you're seeing some of that, I guess, start to improve. Anything that you think with improvement people sort of forget about or move on from? How are you guys thinking about this transition maybe from like triage mode to how you want to address some of the supply chain issues on a longer-term basis?

Yes. Look, I mean we've been the recipient, unfortunately, in the first half of the year of our own suppliers going through that transition, which has led to some of the headwinds that we've seen. So I think from a longer-term perspective, it's healthy. So you see quite a bit of capital investment going into, let's call it NAFTA for lack of a better word, but these are industrial products and they're not easy to move around, and we're all kind of going through that transition. Interestingly, from a CapEx point of view, our CapEx-related businesses are very strong. So the order rates that we're seeing in Belvac and Maag and what's going on in Precision Components and what's going on in Refrigeration. Those are all, let's call them, CapEx-related businesses. And from a backlog perspective and a demand perspective, I mean, they're all sold out for the balance of the year, and we're actually booking into 2023. So I know there's a big debate going on out there between consumer recession versus industrial recession. The CapEx sitting here today, I think that we're more positive than negative in terms of CapEx demand or CapEx-related demand going into 2023.

Makes sense to me. Thanks.

Okay. Thanks.

Thank you. Good morning everyone.

Good morning.

Maybe we'll just stay on that same CapEx theme. Any change in your thoughts regarding CapEx spending expectations for the year for you guys?

Our own, no. No. I think that what we have modeled in for ourselves through the year is we're all done. So I mean I don't think we could we can't spend what we've got in the plan now. So no, I don't think barring a customer showing up and saying, I want X, which clearly we would invest behind right now, I think that we're done in terms of commitments we and you'll see it reflected in the cash flow as we go through the balance of the year.

Got it. And in reference to the early discussion about counting orders, can you talk a bit more about that single largest order? You said it was in Pump and Process; what the application is, how competitive, and how might the margins shake out versus the segment normalized average?

It's polymer processing where the order came from. It's in Asia, and it's slightly dilutive to the consolidated margin but still a very good margin.

Got it. And how competitive was that?

It's competitive, but it's preferable to be up against two other competitors rather than ten. Overall, most of our portfolio is competing with just two or three rivals. So while it is competitive, it’s manageable.

That's helpful. And just last one, if I could. Last quarter, when we talked about pricing, Rich you said you might be pressing more along the lines of surcharges? And how has that played out?

I think that due to the dynamics of raw materials, we haven't needed to implement surcharges recently. It was an option we considered previously, especially since we have made significant price adjustments. This pricing strategy is reflected in our forecasts for the remainder of the year. The question we face now is what we will do if input costs rise again. At this point, we would likely evaluate the possibility of introducing surcharges. While we have made a few surcharges, they have been minimal. Overall, we haven't experienced a downturn in costs; in fact, we view it more as a favorable situation going forward than a challenge like we encountered last year.

That’s really helpful. Thank you.

You're welcome.

Hey good morning all.

Good morning, Brett.

I wanted to come back to capital deployment. You made a comment about proactively evaluating other various alternatives. Could you just put a finer point on that? Is it buybacks, special dividend? What's all under consideration? And then if it is the buyback, would you consider leveraging up or was this just a balance between bolt-on buyback and free cash flow?

I believe that the capital markets would need to show significant improvement before we would consider increasing our leverage. Our focus is more on deployable cash flow, which means that if our opportunities for inorganic growth are limited, we wouldn't keep our projected cash flow balances for an extended period. This would give us the flexibility to return capital to shareholders. Currently, we prefer share repurchase over a special dividend, but this is always a topic of discussion with the Board of Directors.

Okay. Great. And then just shifting to the European pump business there. How large is that on a run-rate basis currently? And I know the order rates have been pretty good there. But can you just speak to the scope of further opportunity in that business, and then specifically how Dover is competitively positioned for the opportunity?

We typically do not disclose revenues by segment because it can lead to complications in these conference calls. However, the scale of this specific purchase order serves as an indicator of future capital expenditure demand. This order is significant in relation to our overall revenue. That segment is fully booked for the year, meaning all our current bookings are for 2023. This indicates a strong revenue stream for that business as we move into 2023.

Got it. Thanks, I'll pass it along.

All right. Thanks.