Dover Corp (DOV) — Q3 2025 Earnings Call Transcript

Thank you, Chloe. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through November 13, 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, everybody. Let's get started on Slide 3. Overall, we are pleased with Dover's third quarter results. Revenue was up 5% in the quarter, driven by broad-based shipment growth in short-cycle components, continued strength across our secular growth end markets, and very encouraging results from recently closed acquisitions. Order trends continued positive momentum in the quarter, up 8% overall year-over-year or 4% organically, providing good visibility for the remainder of the year and into 2026. Margin performance in the quarter was excellent with a record consolidated EBITDA margin of 26.1%, up 170 basis points over the comparable period as a result of positive mix impact from our growth platforms, solid execution, and our rigorous cost containment and productivity actions; all five segments posted margin improvements during the quarter. Overall, adjusted EPS was up 15% in the quarter and is up 17% year-to-date. Capital deployment remains a key driver of our double-digit earnings growth. This year, we increased our investments in high ROI capital projects focused on productivity and capacity expansions, as well as targeted footprint optimization. Our balance sheet strength is an advantage that provides flexibility and attractive optionality as we pursue value-creating bolt-on acquisitions and opportunistic capital return strategies. We have a constructive outlook for the remainder of 2025 and into '26. Despite some macroeconomic uncertainty, underlying end market demand is healthy across much of the portfolio and is supported by our sustained order growth. As a result, we are increasing our full year adjusted EPS guidance from $9.35 to $9.55 to $9.50 to $9.60. Let's go to Slide 5. Engineered Products revenue was down in the quarter on lower volumes in vehicle services, partially offset by solid performance in aerospace and defense components. Despite the organic volume decline, absolute segment profit improved in the quarter on well-executed structural cost management, product mix, and productivity initiatives. Clean Energy & Fueling was up 5% organically in the quarter, led by strong shipments in clean energy components, fluid transport, and North American retail fueling, software, and equipment. Our recent acquisition of Site IQ, a provider of remote site monitoring of fueling sites, is off to a good start. Margin performance, as expected, was solid in the quarter, up 200 basis points on volume leverage and a higher mix of below-ground fueling equipment and restructuring benefit carryforward. Imaging & ID was up 3% organically in the quarter with growth in our core marking and coding business and in serialization software. Margin performance remains very good in the segment at 29% adjusted EBITDA margin as management actions on cost to serve and structural cost controls continue to drive incremental margins higher. Pumps & Process Solutions was up 6% organically with growth in single-use biopharma components, thermal connectors for liquid cooling and data centers, and precision components and digital controls for natural gas and power generation infrastructure. SIKORA, which we acquired at the end of the second quarter, is significantly outperforming our underwriting case. Segment revenue mix and volume leverage drove margin improvement on solid production performance and volume in secular growth exposed end markets. Revenue was down in the quarter in Climate & Sustainability Technologies and comparative declines in food retail cases and engineering services, which were collectively down 30% year-to-date. Industry-wide shipments of door cases are at a 20-year low, in part because tariff uncertainty has caused customers to delay maintenance and replacement upgrade spending. These projects cannot be delayed indefinitely, and encouragingly, we saw a material acceleration in booking rates in the quarter, which signals volume improvement moving forward. Meanwhile, the segment had record quarterly volumes in CO2 systems as well as double-digit growth in heat exchangers and accelerating demand for liquid cooling of data centers and improving sentiment in European heat pumps. Despite the lower top line, the segment posted 120 points of margin improvement on productivity actions and a higher mix of U.S. CO2 systems and brazed plate heat exchangers. I'll pass it to Chris.

Thanks, Rich. Good morning, everyone. Let's go to our cash flow statement on Slide 6. Year-to-date free cash flow was $631 million or 11% of revenue, up $96 million over the prior year, has increased year-over-year operating cash conversion more than offset an expected increase in capital spending. Free cash flow generation accelerated in the third quarter, in line with our expectations and with historical trends, and we expect a further step up in the fourth quarter, which is historically our highest cash-generating quarter. Our guidance for 2025 free cash flow remains on track at 14% to 16% on strong conversion of operating cash flow. With that, let me turn it back to Rich.

Okay. I'm on Slide 7. Let's provide a little more detail on the bookings in the third quarter. Q3 consolidated bookings were up 8% in total and 4% organically from the prior year. I call out the 25% bookings growth in Climate & Sustainability Technologies, a welcome sign as we expect the segment to return to growth in the fourth quarter on broad-based volume demand. On Slide 8, we highlight several end markets that are key drivers of our revenue growth in 2025 and beyond. We are benefiting from major investments in power generation, electricity infrastructure, and artificial intelligence across multiple businesses. We are directly exposed to data center build-out by hyperscalers and the secular shift from air cooling to liquid cooling of new chip technologies. Between our thermal CPC connectors, which primarily connect to the back of the server rack manifolds and directly to the chip, as well as our large and XL heat exchangers from SWEP that are key components in cooling distribution units and chillers, we expect to generate over $100 million of revenue this year alone. Our recently closed SIKORA acquisition expands our exposure to electricity infrastructure through measurement and inspection control solutions for high-voltage polymer coated wires and cables, a direct beneficiary of growing electrification trends and demand from our customers for product quality assurance and improvement. All this electricity has to come from somewhere, and natural gas remains the most viable option for scalable, reliable energy for the foreseeable future. Our Precision Components and OPW Clean Energy businesses participate across several points of the natural gas infrastructure value chain, including gas and steam turbine components, midstream gas pipeline, engines and compressor infrastructure, and valves and vacuum jacketed piping used in liquefaction and gasification of LNG. End market data and customer discussions indicate a very bright future for these businesses. Our single-use biopharma components platform has returned to its long-term double-digit growth trajectory on volume demand and new product launches. Continued advances in biological drugs and therapies, coupled with an industry shift towards single-use manufacturing processes, are fueling sustained high-quality growth for our products. In CO2 refrigeration, we maintain a clear market leadership position in the U.S., supported by a fully platformed product portfolio and a retrofitted plant in Conyers, Georgia, which provides strong competitive moats in product performance, lead times, and scalability. Economic and regulatory tailwinds are driving the transition to CO2 systems as large national retail chains accelerate their adoption with a line of sight of continued double-digit growth into 2026. A significant majority of the acquisition capital deployed in the past five years has been directed towards these high-end growth markets, which remain top priorities for continued investment. Collectively, these markets now represent roughly 20% of our portfolio and are contributing meaningfully to our margin expansion. Moving to Slide 9. Our investments in center-led functions and ongoing focus on productivity improvement are key drivers of our margin expansion. We have made significant progress building out our shared back-office services, digital capabilities, and internal engineering services through the India Innovation Center. These center-led functions enable our operating companies to concentrate on what matters most: serving customers, driving new product development, and responding to market-specific needs while leveraging Dover's global scale and balance sheet. This structure remains a core competitive differentiator of our operating companies, and we extract cost synergies from our existing and acquired portfolio companies. Our Dover Business Services, Dover Digital, and Innovation Center are now fully developed and integrated across the organization. With these operations fully built out, we expect meaningful scale and scope benefits as we continue to grow organically and through acquisitions, further reducing average transaction costs and driving attractive margin accretion. We believe that our shared back-office services will be the largest non-product beneficiary of artificial intelligence implementation. An important part of our business model is to drive productivity through targeted efficiency and fixed cost reduction programs. On the right are some of the key ongoing projects that we had highlighted in previous quarters, including our recently announced transition of the Anthony Glassdoor manufacturing from Sylmar, California, into our existing Hillphoenix refrigerated case facility in Richmond, Virginia, a move expected to deliver significant cost savings. These initiatives are projected to contribute $40 million in incremental carryover benefit in 2026, with additional benefits extending into 2027. Let's finish up on the outlook Slide #10. We expect Engineered Products to improve sequentially in the fourth quarter on double-digit growth in aerospace and defense components and improving market trends and competitive dynamics within vehicle services. Our outlook in Clean Energy & Fueling remains solid across most of the businesses. North American Retail Fueling is starting another capital deployment cycle, and the outlook in Clean Energy components is positive as well. Vehicle wash continues to experience some headwinds, although we expect that to recover. Imaging & ID should continue its long-term steady growth trajectory given its significant recurring revenue base and solid underlying demand with additional upside from serialization software. We forecast this segment to continue its single-digit organic growth trajectory. The outlook for Pumps & Process Solutions is strong and broad-based with an attractive top-line forecast across single-use biopharma components, thermal connectors for liquid cooling and data centers, and precision components for natural gas infrastructure. Bookings and backlog trends in our long-cycle polymer processing signal improving conditions, and the business should return to growth in the fourth quarter for the first time in over two years. Finally, Climate & Sustainability Technologies should grow in the high single digits organically in the fourth quarter on continued strength in CO2 refrigeration systems and heat exchangers, as well as growth in refrigerated door cases from improved booking rates. The full year guidance is on the left. We expect acceleration in our top line in the fourth quarter, driven by our secular growth businesses and sequential recovery in certain capital goods end markets. We are well positioned as we begin to transition into 2026, and our advantaged balance sheet provides attractive optionality to selectively play offense to continue driving shareholder returns. I'll pass it back to you, Jack.

Okay. I guess, Chloe, before you get to the script on questions, if I could just interject quickly. We've had a lot of pickup in our analyst coverage over the last 12 months. So if we could please limit the Q&A to just one question, we would greatly appreciate that. I'll turn it over to you, Chloe.

Rich, you mentioned an improving sequential outlook in vehicle services, improved booking rates in refrigerated door cases. But did you see improving bookings cadence across Q3 for the company? And would you expect book-to-bill over 1x in Q4? And then do these improvements and relatively easy comps set you up for better organic growth here in '26, at least closer to that algorithm that you've given out of 4% to 6% over time?

That's about five questions, Andy, but I understand your direction. The year-over-year decline in refrigeration from basic retail equipment has impacted our organic growth by approximately 1.5% to 2% for the full year. The positive aspect is that we've managed to offset this largely due to our growth platforms and margin improvement year-over-year. Additionally, as noted in the press release, booking rates, especially in that segment, have accelerated, which positions us well for the comparative top line in that business. We are facing a revenue headwind close to $140 million to $150 million that we've absorbed this year. Will we recover all of it next year? We'll see, but I believe we can regain a significant portion if the Q4 trend continues as we approach the end of the year.

It sounded like Andy was mowing the lawn there or something. I have surmised me of back-to-school, one question in 32 parts. But the implied organic in the fourth quarter, I mean, you have a pretty wide range there, but the low end of that range seems to be in and around the mid-single digits for the fourth quarter? And then totally unrelated follow-up to that. Are you guys thinking about buying back stock? I mean, you guys have a ton of cash, and you sold probably a subpar asset for a multiple that's now above where your stock is trading. So any thoughts around a potential buyback as well?

Yes. I think if you go back and look in the transcript, you'll see the corporate speak for, we think our shares are cheap, and we're likely to intervene, number one. And number two, yes, I think that on an organic basis, Q4 should be our highest quarter of the year.

Rich, just back to the sort of the restructuring. Is this the totality of sort of what you foreshadowed for us on the Q2 call? Or are there sort of other actions in place that could then even be additive to this? Or is this pretty much in flight what we should expect for 2026?

We had a significant discussion here about whether to address this now. So, to reiterate, we indicated that we would provide an update in Q3, and here we are. I anticipate that number will rise as we approach the end of the year. The only uncertainty is the timing, whether it will be in '26 or '27, but that number is expected to increase.

I promise I'll limit this to just one question. Do you have any initial thoughts on 2026? I'm not looking for a range, but it appears that many of the businesses facing challenges today could turn into significant growth opportunities in 2026. If these areas of secular growth persist, then organic growth in 2026 could see considerable acceleration. What are your thoughts on that as you look at the current situation for 2026?

Yes. I mean we like the setup. In a strange way, we took the headwinds that we had not forecasted in Refrigeration based on our discussions with customers. But because of rollover restructuring and a lot of productivity and some really healthy mix, we've been able to absorb it this year. The good news is that the setup comparatively looks good there. I'm not aware of any business within the portfolio that's forecasting down revenue for next year. Now clearly, somebody will get it right, and somebody will get it wrong, but it's not like the situation that we had with Maag in the past where it was cyclical, and we knew it was going to come down. The rest of it, I think that we can look at the trajectory in Q4. If you put on just regular seasonality next year, I think the setup looks really good.

Congratulations on the pronunciation of my last name; I appreciate it. Rich, looking back six months feels like quite a long time ago. You faced some pressure due to $100 million in revenue from the previous year, but it seems that has been managed well. As you consider the plans for 2026, do you still think a cautious approach is appropriate, even though the macroeconomic environment has improved? Additionally, the margins this year have been exceptional, reaching an all-time high in the third quarter. It seems like there’s room for margins to increase further in 2026, especially with all the restructuring you’ve undertaken. I'd like to hear your thoughts on how margins might progress as we head into 2026.

Sure. I'll address the margin issue first. There is some mix effect within the segments that we need to take into account, but overall profit should be fine. I don't believe we are overearning from a margin perspective at the moment. Looking at each product line, I don't see anything unusual that indicates exceptional performance, so I don't expect margins to decrease. Our business model, if executed well, always includes rollover restructuring and productivity measures. We can implement this every year for multiple years, which serves as a safeguard against potential volatility or negative mix changes. That's a positive aspect. If we achieve the desired product mix and roll forward another $40 million, that should benefit overall margins. Therefore, I think we are in a good position. As for the setup, I believe I addressed this earlier. We faced a significant headwind in Refrigeration, impacting almost two points of organic growth. This year, we are experiencing a 20-year low in unit volume for that sector. Whether we completely bounce back remains to be seen, especially with a strong expected organic growth for Q4. Let's wait and see how bookings and other factors develop. But as I mentioned before, we are optimistic about the setup.

Can you guys give some context to your data center exposure and kind of terms maybe around content per megawatt or opportunity per megawatt? I mean, do you look at it that way or...?

No. I mean, we have people who try to analyze it that way, but to be honest, in terms of participation, it's significant for us regarding volume and margin. However, in the overall ecosystem and the billions of dollars being spent, we are who we are. Our focus is more on acquiring the specifications for the reference products for our reference customers. I believe we have been quite successful in achieving that for both the brazed plate heat exchanger and the thermal connector sectors. As the market grows as we anticipate, we don't expect a shift in the competitive landscape for those specific product lines. So, if it expands, we will capture our fair share.

Rich, can you just give a little bit more color on that SIKORA acquisition? I think you said that it was significantly outperforming. So that's great to see. And then maybe just give us an update on your deal pipeline and the potential to do more in the next 12 months?

Yes, sure. SIKORA, I think that we had a head start there because we had been working with SIKORA with our Maag polymer processing equipment business on our own for our own uses, and then we got to know each other. We were able to close that because as we learned about the company, not only for our own particular use, but what they were doing and where their exposure was, we really liked it. And knock wood, it's really done fantastically in Q1, significantly better than our deal model would have incorporated for the base year. We are in the process of integrating SIKORA. So if you take a look at that back-office slide that we put in there, in all three areas, we're working on the integration of assembly operations, which is pretty much done. We're going to take what was a single-site manufacturing site and probably expand it at least in two other different geographies over the next 24 months. So that's great. In terms of the deal pipeline, if you look at the overall stats on M&A, it looks like M&A is up significantly, and it is, but it's really very large deals and corporate breakups and a variety of things. The mid-market where we kind of play has been slow. We have an interesting pipeline there. In terms of valuation, I think valuations are trying to find their footing, and that's the reason we've been selective as usual. But we've got enough in the pipeline that I would expect that we'd close on a couple more things over the next 12 months.

I wanted to ask on orders. So a positive update here in Q3, up 8% or 4% organic. But could you provide some color or thoughts on the order to revenue, I guess, conversion for the company? Because you've had pretty good orders for a while now, and it hasn't really converted to the top line to the same degree that we've seen in orders. So I guess, any kind of thoughts on that? And it seems like going forward, you do expect better conversion, whether it's into Q4 or '26.

Yes. I mean the amount of attention that orders get in organic orders and extrapolate that into revenue is one of the great mysteries in life. But we continue to give the data that is more reflective than to me than orders in terms of trajectory and everything. But you're right. I mean, look, at the end of the day, we would have liked organic growth to be higher this year. I think it's been really isolated in two particular businesses. We had an inkling on vehicle services; we would probably have a challenging year. We missed it on refrigeration, clearly. The good news about that is we don't believe that has lost revenue; it's just been pushed largely into '26 now, although we'll get a nice uptick next year. So orders are up. The portfolio is in pretty good shape. If you see segments, we see it down to the individual operating company basis. As I mentioned to an earlier question, we don't see a cyclical decline in any portion of the portfolio rolling into '26. And that's probably the first time that we can say that in a couple of years.

Rich, you made the comment about how you're not aware of any businesses in the portfolio that are forecasting revenue down next year. I guess I'm curious about which ones you're most excited about the growth potential, just when you think about coming off of the Maag, SWEP, Belvac kind of situation last year and now you get kind of cases and doors in the vehicle lift side. And so just thinking about what could be poised to sort of deliver kind of growth that you're getting excited about next year?

Sure. We highlight the growth platform. So I think you can go take a look at that. We think that we are in what should be a 2- to 3- to 4-year CapEx cycle in the fueling business overall, inclusive of the cryogenic components and everything that we bought in that space. So I think our growth this quarter was like 5% organic, which is pretty good overall. And we don't see that slowing for the foreseeable future for a variety of reasons, whether it's customer CapEx or regulatory and everything else. Refrigeration, I think we've beaten that one to death at this point. Belvac is growing this year. I think it will grow some next year, but that's not going to move the needle in comparison to refrigeration and what's happening in brazed plate heat exchangers. Vehicle services, we'll see. I mean, it's been a tough year because a lot of that is exposure to Europe. It's a little bit early to make a call on Europe, but I don't expect it to decline going forward. And actually, the management has done a really great job on the cost structure. So even despite the top line headwind that you see this year, I think if it grows a little bit next year, the incremental margin should be positive.

On Imaging, can you expand on the point about serialization software, kind of size what the opportunity is in some context, please?

Sure. It's 16%, I guess, of the total revenue of the space.

Yes. It's about $60 million, $70 million.

Anyway. Yes, it's levered almost exclusively to pharma. So as pharma builds out production lines, that's when we sell the software and the recurring revenue associated with it. I think that everybody is pretty well aware of what's going on in kind of incentivized reshoring of pharma. And I think that we'll get our fair share of that.

I just wanted to understand, Rich, a little bit better sort of how you've seen the demand environment play out because your tone is quite upbeat on the top line, but the revenue guide is reiterated. And so I guess to put a finer point on it, I wondered if any of the segment revenue assumptions for this year have changed since the figures you guided for in July and whether there had been anything in the bookings that had surprised you positively the last few months or so?

Sure. We clearly fell short on retail refrigeration by a significant margin. The information we received from customers was uncertain, and when it became clear that it wasn't materializing, we felt like we were trying to catch up. The overall impact of that loss for the full year is about 1% to 2% of the organic revenue growth we anticipated. However, that's likely to change since orders increased. We'll have a strong showing in Q4, with an expectation of generating $130 million to $140 million in revenue year-over-year, and we plan to account for half of that growth in next year. The rest of our business is on a good trajectory in terms of orders. We need to be cautious in Q4 as we anticipate our customers' inventory management. Earlier, someone calculated the potential impact on revenue growth for Q4, which seems reasonable. This falls within our expectations and provides some buffer in case December shipments are lower than expected. Overall, the significant change we’ve observed is that the biopharma sector has stabilized, countering concerns about potential restocking. We have confirmed our demand numbers, which remain consistent and should carry through into Q4. The same applies to Thermal Connectors. While there is a bit of revenue cushion for Q4, the key change has been the loss of a quarter's worth of retail refrigeration.

No, Chloe, you can wrap up.