For Inventory, um, and our customer inventory, we think we're in good shape. We cut production proactively in Q3 and Q4, but predominantly in Q4, to allow some of the channel to clear. We can talk about bookings. I'm sure it's part of your questions, Julian, as we go through the business. We've done a couple acquisitions that we closed in January, and the divestiture of Destaco that we announced will likely close at the end of Q1. So we expect the cash to come in from that. What else did I want to say? CapEx should be slightly down, um, in 2024. We've done a lot of capacity expansion over the last four or five years, and some top grading of our facilities, and those are one-time costs, so we think we're in pretty good shape.
I'm not aware of anything, um, significant that we've got in terms of capacity expansion coming forward. You can see what we've been doing on the M&A side, in terms of the in and out. And then we forecasted a pretty good year in terms of cash flow. That you would expect to see anyway, because all of that COVID inventory now has kind of washed its way through the system. So from a balancing point of view, we're in the best shape that we've been, at least in my tenure here at Dover. So in terms of M&A capital return options, I think we're in pretty good shape. This is a slide that we used at our Investor Day last March, in terms of growth platforms.
I think that Jack's probably updated the CAGRs on the bottom, so things are progressing nicely in terms of what we announced as kind of these are all organic. These are not inorganic, these are all organic developments on our part, so we think we're pretty excited about what we've got going on here. And, you know, your typical slide of value creation over time, which we're going to endeavor to continue on in the next cycle going forward. I think that we've got the portfolio in pretty good shape. We think that we've got opportunity to continue to accrete margins going forward. Like most years, we're likely to have some restructuring cost out plans in terms of facility consolidation coming this year, yet to be announced.
And then we expect through-cycle adjusted EPS to continue to compound as it's done over the previous five years, driven by top-line growth and the margin expansion. So I think that is the last slide, Julian.
Perfect. Thanks very much for that. Maybe first off, I suppose, you know, the last kind of four years, there's been a very dynamic macro environment, your customers, your own business. Feels like you've got past now that last phase of it, which was sort of inventory normalization. So how would you characterize sort of the demand environment today? You know, supply, demand, more in balance, any sort of broad thoughts on that?
Yeah, I mean, it has been quite dynamic. I mean, you had basically the acceleration coming out of the COVID period, where I think the top-line growth was in the low teens coming out of that. And then since then, the growth rate in terms of unitary volume has actually not been great. So if you go and you parse out top-line revenue growth, across all the industrial space, generally speaking, a lot of it's been driven by mix, and not so much unitary growth. It did take a while because of supply chain and a variety of different reasons to kind of... That inventory bubble that everybody accelerated out of, to kind of unwind.
I believe that we were very proactive last year. You know, I think we announced more or less in midyear that we were going to cut production, let inventory to clear. We did that after the earnings in the back half of 2023. We said we were going to run for cash flow, and that's why we had a pretty decent cash flow target out there. We've delivered on that. What fundamental growth is going to be in 2024? I mean, we've got one to three. I think that that's appropriately conservative. If you think about that, we'll probably get another 1-1.5 in price.
It's not dramatic in terms of top-line growth, but everybody's really trying to get an idea of, A, what the macro is going to be, and B, you know, this whole notion of the higher interest rates and carrying cost of inventory and of all those other things. So I think these are numbers we can hit. I think that we're going to roll past probably a tough comp in Q1 and then accelerate out of there. But overall, I think time will tell whether this is a soft landing or whether we go into some to a GDP plus environment.
Thank you. Then just sort of, you know, going back to the current period or current quarter. So you talked about the tough comp on sales. So, you know, there is a year-on-year acceleration dialed in. So how much of that acceleration is simply the point on tough comp versus restocking at customers with better final demand?
Well, again, I mean, we're talking about a one to three, right? So, no one really knows what the headwind of destocking was. I mean, you could try to calculate it at the end of the day, but I don't think anybody's going to predict it right. But the fact of the matter is. There was a significant amount of destock, and we can see it in our own good look. A lot of our sales go through distribution, so we can do channel checks on that. OEM sales, it's a little bit more difficult, as we saw in heat exchangers in the back half of last year. But so we can see inventories dropping in relatively benign sales environments. So the question is, if then you put that back into sales, that is what fundamental demand was.
But what that is, you know, I would say it's probably in the 1%-3% last year at the end of the day. For us, price was not overly meaningful last year, so it's almost a rounding error about worrying about price coming down. So I think that the setup is a relatively low growth environment right now. We can talk about pieces of the portfolio because we believe that some are gonna grow quite nicely, and we've got some headwinds and other ones. But in consolidation, 1%-3% sounds right until we see a stabilization of how this whole environment solidifies itself. But I think that we've done the hard work, at least in terms of channel inventory.
I think that's critically important because we can run our factories at a baseline load and not have negative absorption, and we believe one of the best ways to protect price is not get over your skis in terms of channel inventory, and we think that we're there.
You know, when we're looking at margins, as you said, Dover did not have an outsized price-cost tailwinds, unlike some other companies last year. So when we're looking at kind of margin trends through this year, you know, do they sort of move year on year with, with the sales? First quarter, it sounds like sales down a bit, margins down a bit year- on- year, and both of them accelerate year- on- year.
Yeah, I mean, look, it's very much a mix issue, okay? At the end of the day, we're not, you know, we're not an automotive company where we've got this massive amount of fixed costs, and there's a fine band of fixed cost absorption. So we're very much a mix issue, right? So it depends what the comps are. During the time period, look, you saw it over the previous two years with biopharma rolling down, and we were able to preserve margin despite the fact our highest margin business went into a pretty dramatic downdraw coming out of COVID. So once we get beyond Q1 and we get into Q2, it's more of a general mix-up. So if you think about that, let's take a look on the M&A side.
The Destaco is going to roll out, and FW Murphy and a couple of smaller ones that we just closed are coming in. We've basically replaced all of the lost profit with higher margin business, so we don't replace all the revenue, but what we've brought back in from an M&A point of view is less revenue, but higher margin, so it's part and parcel to this whole mix up the portfolio over time.
Got it. You know, bookings, you mentioned at the beginning, they've been, you know, under pressure for the best part of two years. Seems like those turned the corner last quarter. So do you sort of think we have the entitlement now of kind of bookings growth in each quarter this year?
Yeah, I think that that is gonna be the one that we're watching closely, right? Because it comes back to this issue of what do we think that the demand environment is going to be in totality? The one thing we can point to is bookings. I mean, the fact that bookings were down is only relative to the backlog that we had built up previously. So we knew naturally that backlog was going to come down, and that would be reflected in bookings. And that it's pivoted so much, somewhat. I think anybody that's hearing this notion of everybody's kinda giving out guidance, it's back-end loaded. One of the things you're gonna have to look at is booking, right? So that's gonna be, you know, a clear precursor of what we think the backlog is gonna be like.
It's gonna be interesting because there's a big tug-of-war going on right now about everybody knows that supply chains have been kind of repaired, so lead times have come down significantly from where they were coming out of COVID. So there's a little bit of tug-of-war of everybody saying, "Well, can I wait before I bring the inventory in? Because cost of that inventory is significantly higher than it was in the past." But there's, so to the extent that you've got your total inventory in good position, you're in a much better position to kind of manage that situation largely through pricing action.
On that point on price, yeah, I think you were sort of early to say last year that price tailwinds will narrow. That's happening. Are you concerned about sort of where that ends up, that narrowing, or do you think we're getting close to the baseline now?
I don't think I could ever say the answer to that question. I'm more concerned, but I do not expect to come under any significant pricing pressure that we cannot weather. Now, if trade, if the volume is up, sure, but under the current forecast for volume demand and all the work that we did in terms of lowering channel inventory, I think that we're in a very good position to defend our pricing position. And by the way, if you go back and look at what we've taken in price over the last three years, it's not been dramatic. Meaning that, you know, our earnings were not goosed by this massive price-cost spread that you may have seen out there in a variety of different places.
We, you know, we took price, and I think overall, during the time period, we were price-cost positive, but it has not been dramatic.
...And then, you know, a lot of focus, I suppose, you talked about mix and some of the different businesses there. It seems like some of the biggest swing factors this year on mix, I suppose you'd say it's, you know, biopharma, Belvac and SWEP, perhaps leaving aside the acquisitions by investments. So those three pieces, you know, maybe a quick up, a quick hit on kind of how you see each of those.
Sure. Belvac. Yeah, look, we've known about Belvac. We've been signaling that for some period of time. Belvac is a 20% margin business. I think it's something that we can easily weather in terms of, net cycling down because it's a CapEx levered business, and, and CapEx in can making this coming year, and last year, by the way, is going down. So that one, I'm not worried about. SWEP's interesting. We are a subcomponent supplier into heat pumps, and I know that you've probably heard about heat pumps, you know, that everybody was chasing heat pumps. We're in a quasi-triopoly in terms of heat exchangers that we supply into that marketplace. It's only about 30% of the revenue is SWEP. We believe heat pumps are going to grow out of time.
I think everybody got very excited about volumes, so there was some inventory built up into the system. Again, yeah, it's a bit of a headwind in the first half, but on the, you know, structurally, we think we're in, we think that that's a growing business over time, and we're very well positioned. Biopharma, in the one to three that we have, we didn't put a lot of biopharma in there this year. We got bunched over the last two years and listened to our customers' forecasts, so we let them go first in terms of earnings this year. Orders are up, but let's be honest, off a very low base. But I think that we've taken appropriately a conservative view, and I would expect we do not have downside to our view in biopharma and likely have some upside to it.
Great. And so the overall sort of earnings, you know, algorithm of the year is we sort of start earnings down maybe year-over-year in Q1, and then after that, growing each quarter, partly through mix and easier comps. Is that a fair summary?
Yeah. You know, I showed you the slide with the growth platforms that's kind of built into our forecast. I think, again, there's upside there.
Yeah.
I mean, based on what we see in terms of take rates. I showed you in terms of where the balance sheet stands, we haven't been active in capital return, and I think that those who are likely to be active there, either M&A or capital return coming into the year, with the liquidity that we'll have built up on the balance sheet once the Destaco closes. So we'll see about the M&A environment. That's a little bit interesting. I mean, I think that the vast majority of the assets that we buy are privately held, either through individuals or PE. Those valuations never really came down with the equity markets. Now that the equity markets are rallying again, it's going to be interesting to see what expectation is there, as a result of higher interest rates.
Again, it's a little bit of a low growthy environment for everybody in industrial world.
Yeah.
So we'll see as assets come available of how aggressive people want to buy growth going into 2024. I think that we've been arguably very good stewards of capital. I think that what we've bought has been accretive, and we've never gone over our skis in terms of valuation. I think that we've got the opportunity to do larger deals just because of the fact that our balance sheet is in such good shape. So we'll see. Usually at the beginning of the year, there's not a lot of activity, but you would expect as we get into Q2, especially monetization out of PE, it's probably likely where the assets are going to come from.
And on that point, sort of, yeah, that's where you get the source of your deals. In terms of target areas for you, I think, DCEF and then pumps and processing have been the bulk of the money the last five years. Should we expect that to continue, that those two are the lines?
Highly likely, yes.
And then I think, you know, on the point of those businesses, I suppose DCEF investors still have some concerns around sort of secular headwinds there. So maybe update us on how you view the medium-term growth in that segment. Maybe what are investors missing when they focus only on the dispensing equipment?
Sure. I would point to our investor presentation that we did in March in terms of I think that that segment is still viewed as predominantly gas station equipment will go into ICE vehicles, where doomsday was happening over the last three years because EVs not so quick here. It's a lot of different where we've got cryogenic components in there now. We've diversified it through M&A, so it's not as levered towards ICE as it would, would have been back in, let's say, 2018 and 2019. Look, I think it's poised to have a good year this year. Again, that is, that segment itself has got the largest exposure to distribution.... if I take a look segment by segment, proportionality.
So there was a significant amount of destocking headwinds that we, I don't like to keep going over it, but I think that we facilitated. So we go into this year on a fundamental demand basis, I think that cryogenic components is actually going to have a very good year this year. I think the one that we're watching a little bit is the equipment side of car wash, only because that is a little. That's generally an interest rate sensitive business because it's private entrepreneurs, you know, a decent amount of that volume, and they're still trying to work their way into the new normal of interest rates right now. But the bulk of the segment, I think we feel pretty good about.
I think, you know, I think we've got aspirations to getting that segment to 25% margin, and I think we've got a pathway to do it.
Great. And on the portfolio overall, you know, it seems like or the announced moves the last few months, you know, Destaco out, FW Murphy in, you know, I have two things. One is when you look at Dover's overall valuation versus some of the parts peers, you know, how do you sort of see that spread right now? And in terms of narrowing the gap, is it about incremental portfolio moves and executing on the base business, or at some point, do you think maybe larger acquisitions or exits are needed?
Yes, yes, and yes. I mean, at the end of the day, the fundamental is driving margin performance of the core portfolio, augmenting that with M&A and being opportunistic on disposals. If there was an opportunity to create value that was larger, then we do have the optionality from a balance sheet point of view to do that, and then do a subsequent move in terms of funding that acquisition, if you think about it that way, right? By bulking up significantly and then spinning out a portion of the business. You know, those very nice people who write research reports about it and, you know, why don't you do it and everything else?
It's A, it's not that easy, and B, you know, I think that we've been very disciplined over the last five or six years and created a significant amount of value on what was perceived to be underperforming portions of the portfolio. But as they reach kind of their nadir, if you will, or we believe that they're from a strategic point of view that we've done as much as we can, then we'll be opportunistic in terms of pruning the portfolio. And that's kind of what we did with the Destaco at the end, right? No one valued the Destaco at 14 times EBITDA in our portfolio. But we were able to monetize it for 14 times EBITDA, and structurally, you know, between its reliance on auto OEM and China, it was not checking the boxes.
So, like I said, we just took the opportunity to be opportunistic. So, you know, all the cards are on the table and available to us. I think there's a lot of speculation about how easy and, "Oh, don't worry, your, your value." You know, at the end of the day, we're driving performance, taking the cash flow out of driving that performance, and then cycling up on the portfolio, and then when we can, returning the cash to shareholders. And I would expect both of that in 2020.
You know, DESTACO came out of the Engineered Products segment of Dover. At least from the outside, it looks to be one of the more sort of fragmented segments in terms of business diversity, customer set, and so forth. So is that the most logical segment perhaps for consolidating?
Well, I mean, I would argue that it's not well understood, right? I mean, I think it gets comped against capital goods peers that have significantly lower margins than the businesses that are held in our portfolio. So again, it goes back to this issue of, well, you know, that's capital goods, and no one like... and, and maybe capital goods is looked as perceived as lower value, so why don't you sell it? Well, I mean, if you sell it at prevailing capital goods multiples, like getting it eight or nine times, these businesses are not 10% or 11% businesses in capital goods. So again, I think to the extent that we can be opportunistic and get fair value, that's one thing.
But just to do it, to do it because somehow the EBITDA multiple of the consolidated group will just magically go up once it comes out, I think it's, you know, there's plenty of investment bankers who would like to make that argument.
And then one advantage I get of, so the threat is, you know, at any one time, maybe there's 20% of the portfolio that's under some cyclical pressure. You know, how do you think about the benefits of that in terms of, you know, time acquisitions in theory, and so it is or just too complex and what sellers want to do at that time?
Yeah, I mean, you pay in time. I mean, things are for sale when, when perceived value is on the up and nothing's for sale, when perceived value is on the way down.
Yeah.
We don't look at that. We kind of have a view of where we want to invest, and then we've got a view of relative valuation. So if Dover trades at 13x EBITDA, it doesn't mean we're, like, sitting around and saying, "Well, we can't pay over 13x EBITDA." We look at it as, I would argue that you should look at it as from, and the reason the segments are constructed the way they are, is to facilitate a sum of parts analysis, and meaning that what we buy in the higher value portions of the portfolio, you would expect that that's the way that we look at multiples of M&A.
On a disposal point of view, we look at it the same way, and we try to keep that discipline as opposed to just looking at it in consolidation, which is, it is what it is at the end of the day.
I think, you know, maybe one last question before some of the audience response survey ones would be around, you know, kind of core operating margins. You know, we've talked a lot about the portfolio and, and booking the top line. I think people forget that there's a lot of work done on self-help on, on the margin front. So maybe talk about, you know, some of the areas of margin expansion you're most excited about, companies kind of pushing through and, and maybe on acquisitions, you know, one or two examples of kind of cost synergies you have extracted is.
Yeah. I mean, look, at the end of the day, let's deal with the M&A portion. I mean, paying high multiples to buy hard, to buy, to bring in high-margin business, is not value creation. That's just mixing up with cash. So anything that we buy, we'd like it to have high margins, clearly, because the objective would be to mix up on margin, but you've got to have synergy value, and you need to create value and put the cash out as opposed to, you know, without naming names, just continuing to buy high margin business as if that's value creation on one hand.
And that's nice, and we do that through the corporate development group and everything else, but you know, fundamentally, 95% of management time is spent on the core business and moving up in the core business and extracting productivity out of the core business. And that's why, you know, you can expect every year that we're gonna take, you know, restructuring charges, and that's just us intervening and pruning fixed assets that are underutilized in a variety of things that we can do. You're gonna see some more of that this year coming. We've done a lot of work in terms of, you know, we got a little bit of stick over the last couple of years in terms of CapEx as a percent of revenue, and that somehow we're capital intensive. I find that funny. It's like 2% at the end of the day.
We're not that capital intensive, but a big driver of the margin accretion that you can see in some of our businesses was because we reinvested in the physical assets through automation and a variety of other things. So if you take a look, I think in 2019, we did about 8% margin in refrigeration. I think in Q4, we did 16% margin, right? And that is by intervening on the asset base and driving productivity. So you know, that's where all the work is. The M&A is the sexy part, but, you know, it's easy to go buy things at the end of the day.
The hard part is blocking and tackling of driving the margin up, and I think that, you know, we, we believe that we can get a Dover portfolio to 25% EBITDA margin, and we're tracking that way.
Perfect. I think we'll have to switch the audience response question so people can please answer the first one. There's six altogether, so it's pretty quick. Do you own Dover stock today?
What is this, so I plead for people to own Dover today? Is that-
Yes, there's a-
Please?
So fairly unowned, so a lot of opportunity there. Second question is around general bias, positive, negative, or neutral. So fairly positive or neutral. Third question, through cycle earnings growth for Dover versus the multi-industry average, above, in line, below.
I'll put my slide up again, so,
So generally in line with peers. Fourth question, what should Dover do with excess cash? There's clearly a broad list there. So generally, buybacks or smaller deals. Fifth question, what PE multiple should it trade on current year earnings? So generally-
There we go.
High teens. And then last question, what's the biggest kind of share price headwind, or why do people not own more of Dover?