Dover Corp (DOV) — Q4 2024 Earnings Call Transcript

Thank you, Margo. Good morning, everyone, and thank you for joining our call. An audio version of the call will be available on our website through February 20th, and a replay link of the webcast will be archived for 90 days. 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 start on Page 3. Overall, we are encouraged by the fourth quarter. Top line performance was broad-based with four out of five segments posting positive organic growth amid underlying demand across the portfolio. Bookings were up 7% organically in the quarter driven by robust order rates and our secular growth exposed markets as well as positive inflection in several end markets that have faced tough comparisons during the year. Our bookings strength validates our previous demand outlook for 2025. Segment margin performance for the quarter was solid at 22.2%, up 60 basis points over the prior year. We are quite encouraged by the product mix impact and prior period fixed cost restructuring on segment margins during the quarter. We expect this to be a precursor to the strong incremental margin performance that we anticipate in 2025. Excluding the $0.25 tax reorganization benefit in our effective tax rate in the fourth quarter of the prior year, Q4 adjusted EPS grew 14% in the quarter, and was up 8% for the full year. Our operational results were complemented by our ongoing portfolio actions. We recently closed two bolt-on acquisitions within our high priority pumps and process solutions segment, and our acquisition pipeline remains robust. We ended the year with a significant cash position that provides us flexibility as we pursue value-creating capital deployment to further expand our businesses in high growth, high margin priority platforms through organic investment and acquisitions. We are optimistic about 2025. Underlying demand strength has continued across the portfolio into January. We have significant runway for margin improvement through organic growth, positive mix benefits, and numerous cost and performance levers. We have high confidence in Dover's attractive end market exposures, flexible business model, and proven execution playbook. With this backdrop, we are poised to deliver double-digit EPS growth in 2025 through a combination of accretive top line growth, margin improvement, and value-creating capital allocation.

Thanks, Rich. Good morning everyone. Let's go to our cash flow statement on slide 6. Adjusting for taxes paid on the gains on dispositions which are non-operational in nature, our free cash flow was $429 million in the quarter or 22% of revenue. Our fourth quarter was our highest cash flow quarter of the year in line with historical trends. We are pleased with our full year adjusted free cash flow generation which came in at 13.5% of revenue within our guidance range despite carrying large accounts receivable balances at the year end. That will be a credit to early 2025 cash generation. Our guidance for 2025 free cash flow is 14% to 16% of revenue on strong conversion of operating cash flow. We are forecasting slightly higher CapEx in 2025 on several growth investments. With that, I'll turn it back to Rich.

Thanks. I'm on slide 7. Here we provide a little more detail on the bookings momentum in the fourth quarter. Q4 marked our fifth consecutive quarter of positive year-over-year bookings growth posting a book-to-bill above one. As shown in the segment detail on the right, the bookings rates were broad based with particular strength in our secular growth exposed markets, providing a strong foundation as we move into 2025. Slide 8 highlights several end markets that were driving our consolidated organic growth forecast. Between end market data, our customer forecasts, and our own booking rates, we are encouraged with the outlook in the broader industrial gas complex within Clean Energy and Precision Components, single-use biopharma components, CO2 refrigeration systems, and inputs into liquid cooling applications of data centers which include our connectors as well as heat exchangers. We have made significant organic and inorganic investment behind these end markets which will continue to prioritize into 2025. In aggregate, these markets now account for 20% of our portfolio and drive attractive margin accretion on expected double-digit growth rates. Moving to Slide 9, we expect Engineered Products to grow low single digits organically on sustained strong orders and shipments within aerospace and defense which should be levered to the second half of the year due to the timing of government programs. With the divestitures of De-Sta-Co and Environmental Services Solutions Group in 2024, our Engineered Products segment now accounts for roughly 15% of our total portfolio down from 25% in the prior year. We are optimistic about the growth outlook in Clean Energy and Fueling which should return to positive volume growth due to strength in Clean Energy components, fluid transport, and above ground fueling. We expect this segment to be among the leaders in margin accretion in 2025 on volume leverage and positive mix from below ground fueling. Additionally, we can expect carryover of multi-year restructuring actions and acquisition integration benefits which will primarily accrue in the second half of the year. We expect Imaging ID to continue its long-term steady growth trajectory given its significant recurring revenue base and solid demand profile across all geographies. Management has done excellent work to improve the margin here through productivity and structural cost controls, and we believe there are multiple years ahead of continued margin accretion. Underlying demand trends across Pumps and Process Solutions remain solid. Shipments of single-use biopharma components should continue their double-digit growth rate driven by production growth in blockbuster drugs and the emergence of novel technologies such as cell and gene therapies and the continued secular shift towards single-use manufacturing. The outlook for thermal connectors for liquid cooling data centers is robust. Our preemptive capacity expansion has allowed us to maintain industry-best lead times in what has turned out to be a short-cycle business. Our precision components business is directly levered to energy complex investments, so we are quite interested to see how that plays out in 2025. Finally, climate and sustainability technology should recover well as difficult comparisons roll off in heat exchangers and beverage can making. With the recent launch of our high-capacity platform and CO2 refrigeration systems, we have the broadest product offering in the industry. We are currently taking orders well into the second half of 2025 and should continue to grow at a double-digit rate due to the broad-based adoption among national retailers. Heat Exchanger is expected to grow as European heat pump channel inventories have been largely depleted, and we are forecasting sustained growth in North American heat exchangers. We have completed a capacity expansion for large format production driven in part by liquid cooling applications in data centers.

Our guidance this year is a bit unique since we provided preliminary outlook for 2025 during last quarter's earnings release, which we felt was necessary given the significant portfolio moves completed in Q4. Our 2025 guidance is in line with that preliminary outlook from a quarter ago in terms of organic revenue and EPS growth with the underlying building blocks intact. There has only been one noteworthy change from last quarter, which is a heightened foreign exchange translation headwind from the strengthening U.S. dollar. While this incremental headwind, which is by no means unique to Dover, we are confident in holding our full year guide due to the positive and broad-based bookings momentum we had during the year.

So pretty much we're going to adjust for everything that we saw when we ran from October to January in terms of FX, which is not a minor factor. We entered 2025 in an advantaged cash position. Our preference is to deploy capital towards organic growth investments and our inorganic growth pipeline, which has improved in both quantity and quality of opportunities over the last several months. Rest assured we will proceed with the capital discipline that we have demonstrated in the past. Finally, before we move to Q&A, I'd like to take a moment to recognize and congratulate Brad on his retirement. Since joining Dover over 15 years ago, he has been an instrumental strategic and financial leader who has helped transform Dover to our current operating structure today. I’m sure Brad couldn't think of a better send-off than to spend his last days preparing for this earnings call. On behalf of all of us, thank you, and we wish you all the best.

Thank you for that Rich. Much appreciated. It's been absolutely a pleasure to work with you, the entire Dover team, our board, and of course the finance organization for so many years. Chris Winkler will take it from here and I wish him the very best.

Hey, good morning. Brad, congrats and thanks for all the help over the years. You've definitely seen a lot there, a lot of change. So congrats on the run. The slide last quarter talked about 40% conversion and $25 million of restructuring benefits. This slide says 40% plus. Are you still assuming the $25 million of restructuring benefits? I don't know. There's a lot of up arrows on that margin slide. So just maybe help calibrate us a bit on the margin drivers and price cost.

Sure. Like the restructuring benefit hasn't changed. As I mentioned last quarter, we've got some more in the pipe, and when we do it, we'll give you the roll-forward benefit of it, which is not embedded into our forecast presently. The balance of it is mix. So if you look at the margin accretion that we saw in Q4, I think it's a pretty good precursor of what we can expect, and then we'll see from there. Then it's just a question of the volume that we see.

Got it. And price cost, what do you guys assume for price on the year and will that spread be positive?

It will be positive. Not a lot either way in terms of benefit, point, point and a half. We'll see. It depends on the mix that we get, but it will be positive.

Thanks. Good morning, Brad. I'm sure you're going to get a lot of congratulations and all that, but you've been at Dover for a long time. You've been the one sort of constant for the last 15 years. So it's quite a moment here. So congratulations.

Thank you. Thank you so much.

No, no, Rich, you mentioned January and whenever you mention sort of current within the current period, it always sparks a bit of attention. I'm just curious if you think that tariffs or the potential for tariffs is causing any sort of unusual behavior around the supply chain that you touch?

No, we don't see it. I mean we're generally speaking a proximity manufacturer. So our backlogs are more influenced by the lead times of the individual products, which are kind of all over the place between the short cycle and the long cycle. No, we don't see any need to get ahead of this because we think that there's going to be tariffs. We have a few businesses that are global in nature, but the vast majority of it is proximity.

Okay. And then just a quick question on the margin outlook. You mentioned CEF is going to be the margin leader. I'm just curious if we could just maybe just if I could just ask if the 20% plus handle would be reasonable there, just based on what we saw this quarter. And then similar vein with DPPS, just given the exit rate, would a 30 handle be reasonable for this year?

Look, I think that the absolute change in margin we would expect in CEF, we are driving at the segment level in excess of 20. All right. You may not get it every quarter depending on the cyclicality of it, but clearly at an exit rate in excess of 20 on DPPS, it's all about the mix. So if we're under-calling Biopharma and we get better results there, then clearly that will mix up. But if Precision Components does better, it's a little bit dilutive, but it's still at 25% margin, so we'll take it all day long. So it's more a question of what we get in terms of mix going from here.

Okay, fair enough. Thanks, Rich.

Thanks.

Good morning everyone.

Hi Andy.

Brad, thanks for all your help. Congrats.

Thank you.

Rich, thank you. Book-to-bill over one again in Q4. Are you thinking 2025 is another year where all or most of your quarters could achieve book-to-bill at or over one? And I know you're expecting an inflection in CO2 orders. It looks like you got that. And you mentioned the double-digit expected growth in that business is expected to continue. But given recovery in other DCST businesses, at least in terms of orders, it seems like you expect DCST bookings momentum to continue. Maybe you can comment on that specifically.

Yes, I mean I would expect based on our growth rate, we'll hover around one. I mean, I don't think we should get overly concerned if it's 0.98 in a quarter, but we should hover around 1 for the year and then we'll make a call on Q4 as we exit. Yes, I mean, we did get some bookings in Q4 in CO2 systems. We've got a lot coming our way, so I would expect bookings to look good there. Coupled with the fact, maybe not in Q1, but as we go into Q2, we'll inflect positive bookings in Heat Exchanger. So that will help in terms of effect.

Got it. And then can you give us a little more color into how you think about earnings cadence through the year? It seems like we start out pretty slowly in terms of organic growth in Q1 given DCST and DP could start slowly in terms of growth, but more color on Q1 and the trajectory for the rest of the year would be helpful.

Yes, I mean, it'll go back to, now that we're beyond kind of all the COVID stuff, and we'll go back to, we'll start off a little slowly. We'll probably build a bunch of inventory in Q1 that we will recognize as revenues in Q2 and Q3. And then Q4, like every other year, we'll decide on the outlook of 2025, how we run production, but we'll make those decisions in the August-September timeframe. So, yes, I mean, I think that. I think quarter-to-quarter will look okay, but I mean it will be a ramp into Q2 and Q3.

Appreciate the color. Thanks.

Hey, guys, good morning. And Brad, thanks so much. Wishing you nothing but the best.

Thank you.

Maybe let's just hone my questions in on DCST. Rich, maybe talk a little bit about what you're seeing in that European heat pump market now expecting growth in 2025. I think you maybe mentioned inventories have also stabilized there. Just give us some color on what you're seeing there.

Well, I mean, the margin performance that you see for us in Q4 is us basically under-producing severely. So it was a willful attempt to force inventory clearing out of the channel. But having said that, orders inflected positively; let’s not get too excited off of some pretty low levels. So I would say that we did our part to allow inventory to clear, and just sequentially orders are coming up. It's probably still going to face a tough comp in Q1, but then from there we would expect to ramp over the balance of the year. What that ramp looks like, we're taking our best estimates right now. As you know, getting good data out of our own customers has been quite difficult. But we would expect to have a prudent outlook for it and hopefully to see a sequential increase over the year. What we're confident about is we took some direct action to allow inventory to clear in the back half of the year.

Got it. That makes a lot of sense. So as you think about then kind of like the rates starting point for margins for that segment, given that you took that big hit in the fourth quarter, how do you think about then the margin trajectory in 2025? It would seem like you should get some pretty good margin expansion in that business.

Yes, I mean once we lap Q1, Q1 is always a little bit messy, because in traditional refrigeration equipment it's not a heavy shipment. We tend to build inventory there as opposed to shipping it. And as I said, SWEP on heat exchangers has probably got a tough comp there. Having said that, we were very pleased with the margin that we got, the exit margin that we got from refrigeration. So that's what we're booking in for the balance of the year. And to the extent we under-produce so severely in heat exchangers, we have like negative fixed cost absorption there in Q4. We'd expect that to get better over time. So net, net if you just look through the downturn in heat exchangers, with all the progress that we made on refrigeration, we would expect that we would be maybe not at record margins because I'd have to triangulate for Belvac a little bit, but some very good margins in that segment compared to historical benchmarks.

Great to hear. Thanks, guys.

Thanks.

Thanks, good morning and best of luck to Brad.

Thank you.

Hey I wanted to come back to the bio orders, really strong. I guess any detail in the nature of the applications you're winning? And any concentration: Is there 1 to 2 customers? Is it fairly broad-based? And then how should we think about that delivery schedule?

It is broad-based. I mean, we cleared inventory in the back half of this year and then you started to see orders inflect, and I think that started roughly at the end of the second quarter. We don't know a lot in terms of where it ends up because there's a big portion that's sell-through from our clients at the end of the day. But I think I would categorize it as we are a supplier to end-use production and that the inventory has cleared out of the system and that those units are operating now, and it's just pull-through.

It makes sense. And then just a follow-up on liquid cooling, very strong demand again, obviously, with everything that's going on. But maybe talk about that specification process with those partners. How large has the total addressable market for Dover grown over the last couple of years? And where do you think your share of that can run?

Well, it's grown significantly because it was a traditional product of ours that had been supplied into supercomputing applications. What the TAM is, is anybody's guess right now. If you go back and look at the transcript, I think that we made the right decision in terms of having the product available, and we made the right decision to build out the capacity in advance of the demand because it has turned out what I would have thought to be a business that would have required foresight on our end regarding build-out time for these data centers. It's turned out to be a very short cycle business for us. So the data that we get on where the product is going is nearly at the last minute. Now we've been a market share winner here because we've got the capacity installed, although that did affect some of our working capital in the fourth quarter of this year. But I can't even give you TAM numbers, quite frankly. I don't think anybody knows. We'll see how it plays out. But right now, I'm very proud of the management team in terms of how they've managed an incredibly complex situation.

I appreciate the detail.

Hey, good morning everyone. And congrats, Brad.

Thank you.

So just another high-level question here. Just to make sure I understand the cadence through the year. And in answer to the earlier question, the thought process then if I think about typical earnings by quarter, relatively normal or a little subdued in the first and then build it up in the back. But then related, are you basically assuming the underlying demand dynamics are relatively stable with current levels, not improving, not getting worse, but relatively stable in normal sequentials? Is that the thought process?

I believe the progression should be fairly steady and generally consistent from a scheduling perspective. There aren’t any significant changes expected, and the mix benefit should remain stable. When we consider the additional growth moving forward, most of it will occur in the second and third quarters. So rather than experiencing a decline followed by an increase, it will gradually progress. The mix impact on the business is expected to stay consistent, as we will be shipping based on the current order rates. The growth we anticipate producing in the first quarter will be shipped out in the second and third quarters, which is our current estimate.

Yes. That makes sense. And then just an update on the M&A side. Any change to what you're seeing from a backdrop, actionability, and the amount of content that might be in the market at some point?

Yes, lots of stuff coming. We're really interested to see what the sentiments are out there and how aggressive everybody is going to be at valuation. But those are the ones everybody knows about. We've also got a handful of very interesting proprietary deals that we're working on. So we'll see. I mean, we're very attractive in the multi-industrial world because of all the cash that we're sitting on. So we're seeing a lot, but time will tell about what multiples look like once we see a couple of transactions.

Yes. And keep in mind that that cash on the balance sheet right now is not deployed in our forecast. It's generating nice interest income, so it doesn't create a hole in our pocket, so to speak. And when you think about your models, just keep in mind that we're sticking to our year-over-year concept around interest income until we deploy that capital. Then you'll see a shift between the interest line and the segment performance line as we pursue deal flow.

Thanks, guys.

Thanks.

Thanks, good morning and Brad, thanks for all the help. If we think about just the segment level, I wanted to start with clean energy and fueling—it seemed like you did see some very encouraging signs exiting the year in below ground and vehicle wash. And as we're thinking about the 2025 guidance, maybe help us understand how much of the business now is going to come together in fair growth there against the more traditional parts of DCEF.

Okay. I'll need to review the information, but I believe that in terms of absolute profit, that segment is the largest contributor year-over-year. This is due to a combination of restructuring benefits, a favorable growth mix, and acquisitions we made in the previous period that are now being reflected for a full 12 months. Breaking it down, we'll allow Jack to explain further, but in terms of our exposure to cryogenic components, we are significantly larger than our closest competitor.

That's helpful, thank you. And then secondly, on engineered products, there's been a lot of change in the business mix there. Aerospace and Defense, a big factor now within EP. And maybe remind us of the main exposures there because it looks like the volumes there were down in the fourth quarter but should grow this year as a whole in EP. Maybe kind of remind us sort of what's moving around in that? And what's the visibility on that second half improvement in the A&D shipments?

The comparison was challenging in Q4, and that drove the commentary, which was a result of timing of shipments. I think we had some pretty big shipments in Q4 of 2023. Having said that, the business is as big as it's ever been in terms of its absolute size because we've actually expanded through acquisitions in that area. In terms of the calendarization, I'd have to go and work with Jack to see what 2025 looks like, but it is posting to grow year-over-year and have a positive margin mix benefit on that growth.

Great. Thank you.

Welcome.

Hey thanks, good morning everyone. Congrats, Brad. I know we go back a long way.

I know, a lot of years, Jeff.

Maybe a CFO question to start. Just on kind of interest income for that color. I assume rates are a little bit more favorable on sitting on cash than maybe you thought if you were thinking about the Fed adjustments—that is, in fact, helpful. And then also, I just wanted to clarify; that guide that you're talking about is really only accounting for cash on hand. It doesn't look like you're giving yourself any credit for just a very solid free cash flow generation you're expecting in 2025?

No, I think it's inclusive. But we have uses of that cash flow like we normally do, right? So we'll have to see; it is volatile in the sense of how many rate cuts will there be next year? We model it out. And when I say we're sticking with our year-over-year that we guided back or gave insight into in the third quarter, it is all inclusive for sure. But capital deployment will impact it, Jeff, and there's a lot of variables. So I think at this stage, give us a quarter to sort it out and see how deals flow through, and then we'll be able to give you more insight into it.

But this one has got a ton of FX in it, and it fluctuates between equipment and consumables. So we don't get too worked up about intra-quarter volatility. We look at this business really on a full year basis. It grows 2% to 4% at the end of the day. So I wouldn't worry too much about intra-quarter volatility.

Okay. All right, good to go. I'll leave it there. Thanks a lot.

Hi guys, good morning. Yes. We'll try and congrats Brad on his retirement. It was a pleasure.

Still saying we when he answers the question.

I know.

It's encouraging because...

We're going to be here through capital deployment. I'm binge-watching 'Severance' these days, so just lots of questions on the 2025 outlook for growth in vehicle wash is much better than the commentary from peers, and I would also say above ground is turning. Do you think you're gaining share? Or is it a real turn in the market?

Well, I mean, I got to be careful with the peer commentary in vehicle wash because a lot of them own distribution and operate sites. We don't; we're purely equipment manufacturers. I think the commentary around that it’s gotten better, but it's not inflected super better, but even a little bit better on a margin point of view is positive. I think the real material inflection that we're seeing there if we take the cryogenic side and put it aside, is the mix impact—a couple of things. The mix impact below ground, which has been pretty depressed for two years or three years now, which is highly margin accretive. That's good. A lot of the restructuring we did last year is in this particular segment. So that's where the flow-through comes in, which is good. And then the cryogenic piece, I talked about at length in Q3. We’re going to go through a big integration year here and expect to get the integration benefits of those prior-period acquisitions, probably primarily benefiting the second half of this year. So it's got a lot of kind of non-revenue benefit bundled together and the mix is improving.

Excellent, thank you for an extensive answer.

Hey good morning, guys. And congrats. I'm sure you're going to miss that flight out on Monday morning or Sunday night or whatever in Chicago, but you spent some frequent miles our way, I guess, probably have plenty. But anyways, I think you guys have covered most of the turn here. It's been a lot of minutia too. But if we back up a little bit, is the refrigeration story just about CO2 in 2025? Or is it really also just about pent-up demand that there has been a pretty long period, I think, of underinvestment from your customers? Is that a correct assessment?

I think that's a correct assessment. But recall, we have capped our capacity in that particular segment. So it's more for us margin performance through productivity plus CO2. Okay, so we're not going to chase dilutive growth on the retail refrigeration side. So between our CO2 product offering and specialty product offering, we will take as much as we can get there. On the case business, we'll see. We're in early innings now about the CO2 transformation of whether you can bundle the CO2 system with the case and what that means for margins? I think that is something that will unfold during 2025.

Fair enough. And then just a small question. I guess I've never asked this before, but if you had to split up your CapEx between kind of maintenance and growth, how would you think about what kind of that base level of maintenance CapEx is in the numbers?

That’s a good question. We used to give a little pie chart on that. I'm guessing that it's about $40 million maintenance, but that does not include IT, and I’d say the other is 60% growth. And if I had to carve out IT, I'd have to get back to you, Scott.

Okay thank you, guys. That’s a lot to share.

Thanks.