Excellent. We're on time. Thanks so much. Our next presenter is one of my all-time favorites, Dover, and the company's Chairman, President, and CEO, Rich Tobin. I think Rich has a couple of slides, and then we're going to go into Fireside Chat. Thank you very much for being here.
I guess I should stand for the slide part. All right. We'll do, I think, two slides. One is just basically a reconciliation, how we ended Q1, and I can give you some comments on where we're tracking it. For Q2, I think the most important thing that we had talked about at the end of closing 2023 was the proactive work that we had done on channel inventory, so not just our own but our OEM customers and our distribution. And that if we had done that work correctly, that we would expect to see an inflection in order or booking rates in Q1. And that's what we saw.
So unlike last year, where it was difficult to get a feel for fundamental demand because you see the headline figures of revenue, but what you can't calculate is the headwind on the destocking factor, I think our general commentary now is we think that inventories are low in total. We don't see kind of stocking yet. What we see is basically pull-through. So when you look at our revenue figures and the growth rates associated there, they should be a reflection of what the end markets are doing, not because of inventory build or depletion from there. We were reasonably active on the portfolio. I'm sure those we'll leave that to Andrew in terms of the questions. When we get into it, we did a couple very interesting acquisitions. We sold something, which we don't do that often.
We sold DESTACO in March of last year out of our Engineered Products segment. And then you can see the guide, which we did not, we left in place for 2024 after the quarter. I can tell you anecdotally that what we've seen in Q1 has continued into early days of Q2. So nothing dramatically better, nothing dramatically worse, just kind of like a steady roll forward. I'll also tell you that in terms of the seasonality of our earnings, that Q2 and Q3 are very important. Actually, what we've baked into our forecast here is a relatively unaggressive Q4, right, just because of visibility being what it was when we gave the guidance out. So if there's any fear about backend loading to the extent that we hit our Q2 and Q3 numbers, I don't think that we're going to have much of an issue.
And hopefully, by then, if the order rates continue to build and the macro is maybe a little bit better than it is right now, that we'll be in good shape. And then we'll decide what to do with Q4. If we think that 2025 looks good, we may, from an inventory position, run harder in Q4 than what's planned right now. And that would be good for absorption in Q4. But we're going to wait a little bit to see what fundamental demand looks like before we make that decision. I won't spend a lot of time here because I'm sure that Andrew's got lots of questions. We're a multi-industrial, so everybody understands the endless discussions about portfolio construction, which we're willing to take on anytime. But a lot of what we do is also organic investment and product development.
We're showing you four of them that we're kind of excited about right now. U.S. CO2 systems, we are the market leader or co-leader in European installations for retail refrigeration installs in CO2. We've transferred that technology from Europe to the United States and repurposed a factory for that over the last two and a half years. We are now the market leader in the United States in that particular application. What's interesting about it is in Europe, these are bespoke systems. They're configurable. For lack of better word, what we've done is platformed this product for the United States. We think from a manufacturing point of view, this is something that from a margin potential point of view, because it's been platformed, we're going to have a factory that runs three platforms.
For lack of better word, it's large, medium, and small systems for CO2. That is legislatively driven in the U.S., and we can kind of talk about that in the Q&A. U.S. heat exchangers, I know there's lots of discussions about heat pumps in Europe and everything that's going on. We're one of the primary suppliers of brazed, right, heat exchangers that go into that application. So it's a bit of a headwind right now in 2024. But that's about 30% of our revenue goes into heat pumps. So the other 70% goes into a variety of other applications. We expanded capacity in North America proactively a couple of years ago because we felt that those types of technologies were going to slowly be adopted in the U.S.. And so far, so good. We're right.
So our bookings are up 25% vs last year, and we've got ample capacity to win in that marketplace. Thermal connectors is something we've talked about recently. These go into water-cooled applications and data centers. We have a connector business. So a lot of the press that we've gotten about this business is biopharma. But of those of you that came to our investor day a year-plus ago, I guess, we had purpose-built a new factory for the non-biopharma connector business. So we've got the installed capacity. This is a product that has to be made in a clean room. So it's very similar in terms of the manufacturing process that we have for biopharma. And we're pretty excited about the IP that we have, the product in the product, and the spec wins. And you can take a look at the revenue CAGR.
We'll be off a low base, but we're pretty excited about it. And then in biopharma, we leave that in there because we've had two and a half years of post-COVID depletion on the inventory that got built up into the system or orders turned positive in the latter half of last year and are positive this year. Our forecast accommodated not a snapback in volume, so it was pretty conservative. So to the extent that this gets better throughout the year, that's kind of upside potential in terms of margin earnings potential. And I think that's the slides, and we'll go to Q&A.
Excellent. Okay. So why don't we start with just sort of drill down on the growth markets? So as I said, sort of CO2 refrigeration systems have far lower greenhouse gas risks than traditional HVAC refrigerants. And as I said, Dover is the market leader for CO2 systems in the U.S., number two in Europe, roughly $200 million in revenue. You've outlined CAGR over the last five years. So you did talk about legislatively driven growth in the U.S. Can you just discuss in more detail what specifically are the regulatory requirements in the U.S., and what does this mean for the growth of this business over the next several years?
Right now, it is state-driven. So California, surprise, surprise, has adopted it on all new builds of retail refrigeration. So if you were to build a new store in California, legislatively, you have to put in a CO2 system. You cannot use a legacy application. And then we've seen kind of a rolling adoption from there between Wisconsin and Massachusetts and pretty much all the places that you would expect to kind of follow on from California. More importantly, everybody kind of knows it's coming now. So you see a lot of early adopters, especially in small format applications, that are just deciding legislative or not, "We're going to choose this technology and put it in." So it's going to take years for this process to take place.
We feel real good about the fact that this business is going to go from nothing to approximately $100 million in revenue in North America this year alone. These are just with early adopters. The market potential in terms of its size is significant. We built or repurposed an entire factory to accommodate this volume. Right now, we're carrying the depreciation cost to the factory we built, and we're growing into it. We would expect, as volume grows, that our margin, as we absorb those fixed costs, will continue to get better. Feel good about where we are in terms of IP and market adoption.
Gotcha. And so when would you think sort of the big players are going to start looking to standardize their offering nationally? Are we three years away, five years away?
Well, there's a lot of players in the market, but you need to understand everybody doesn't sell into the total marketplace. So if you think about cold chain warehouses, there are different players. We're in there, but that's not our primary market. But there are different players there that would like to enter into CO2 systems there. Then there's retail food, which is basically our wheelhouse. That's what we're in. And right now, out of our kind of historic competitors in systems, I think that arguably we're a couple of years ahead in terms of footprint and in terms of installs. I would expect over time, some of the European competitors will try to enter the U.S. market. But to the extent that we launch all of our platforms successfully and have the standing capacity, I mean, we're just going to have to.
My question was more like, when somebody like Whole Foods would—because we've done a tour with you guys over the years in Whole Foods showcasing the latest and greatest from Dover. When does Whole Foods just start thinking about sort of rolling it out nationally?
Part of our volume, the way I could describe the volume in North America, is early adopters that have just chosen, "We're going to get on the front foot." It's a marketing issue, right, in terms of green and everything else. And then you've got everybody else that's putting in test stores.
Okay. Gotcha. Okay. Thank you. And I guess just to think about the margin, it seems that right now, you have a lot of sort of fixed cost absorption because of depreciation. But once the volumes get up, it sounds like how would those margins compare with the rest of Climate and Sustainability?
It will be accretive to the segment margin.
Excellent. Also, and once again, I think we've seen at ACHEMA, you've built up a couple of offerings to participate in the hydrogen infrastructure buildout. You have flow control components for liquid hydrogen, fuel equipment, and compression equipment. I think there's big debate what's going to happen with hydrogen. But are you starting to see early awards from the $7 billion of federal funding for hydrogen infrastructure? And what is the outlook there?
We're quoting like mad. But as you know, these are very long-tail, multibillion-dollar projects. And I would kind of recast what we're trying to do. Hydrogen is part of it. But if you think about cryogenic applications, which is CNG, LNG, and hydrogen, require a variety of special application valves and piping and a variety of subcomponents that go into these systems, that's where we've been an acquirer. So into that complete space, hydrogen gets talked about because of the reasons that you're bringing up, and we're a participant there. But it's more around this notion of thematics, who's betting on what. You've got a variety of people betting on electrification. We're upstream from electrification, right? You can't make electricity out of nothing, right? So we'll be making big bets on kind of the wider gas complex. And we do that either from subcomponent side or from the compressor side.
That's part of the reason we did the acquisition of FW Murphy last year.
Gotcha. So for you, hydrogen sort of falls into overall cryogenic offering?
You have to have an understanding of cryogenic applications even to participate in hydrogen.
Gotcha. But you think that the skill set and material science, that's transferable. That's how we should think about it, that you can scale it up. You can scale up your cryogenic offering into hydrogen.
It's what we do, right? It's subcomponents. It's machining. It's that type of thing.
Gotcha. So maybe just the last one. We had Vertiv earlier today. So apparently, people are excited about liquid cooling. I don't know if anybody heard about it here. But you do make the connectors that make it work. You are getting specced in with the server OEMs, I think, booking growth over 100% in first quarter. So how excited should we be about this opportunity? And just for reference, how big is Colder Products today, the connectors business, and how big can it get?
Sure. Sitting here today, we think it's about a $30 million opportunity for us. But you have to understand we're selling into basically R&D applications presently, right? So there's this huge amount of capital coming for the build. But you can imagine everybody's trying to test these builds right now. So we started in this business years ago because the only application that was using liquid cooling in the past was supercomputers. So we've been selling these connectors to IBM and Cray for almost a decade. So we've been working on this a long time. Now that water cooling's come to kind of data centers, it gave us kind of a little bit of a head start, particularly around the IP in this particular case. So we feel good about where we are in terms of the specification with the leading chipmakers.
Market sizing is undetermined right now because the numbers that are flying around it wasn't too long ago when we were talking about these batteries for EV applications and the $ billions that didn't turn out to be much at the end of the day. So I think we're going to be a little bit careful about sizing the market, considering the fact out of the entire bill of materials for a data center buildout, we're not exactly a material component of that. But on the other hand, we think that a lot of what Dover does is to find a niche kind of application product that's got a lot of IP and a lot of barriers to entry around it. I think that we feel pretty good. So hopefully, $30 million for 2024 is conservative.
Who would you be working with? Would you be working with nVent? Would you be working with Vertiv? Would you be working with NVIDIA? Who do you sell your product to? Delta?
We've been working for years with the chip manufacturers themselves because in their R&D, they had to do the work to how those chips would operate in the ecosystem. Now, we're working with basically are going to be the builders of those systems without naming names.
Okay. But is it fair to assume that because you've been here for a while, you have broad exposure to the builders of the systems?
We think that we've got the spec from the main chip manufacturers, and we've got a product with a lot of IP around it, and we've got standing capacity where we could quadruple volume within a relatively short period of time.
Okay. Okay. So you could quadruple? You have quadrupled. Sorry.
Could.
Okay. Okay. So let's talk about biopharma. You've been dealing with the destock for six to seven quarters, and you've alluded to sort of sequential booking growth, book-to-bill 1.08. So the question we do get from investors is, "Okay. It's bottom. But what's the growth outlook here?" You said you sort of alluded fourth quarter could be potentially better. But what should we look at for a turn in this to get more confidence in return?
Orders. Orders at the end of the day, right? We are a subcomponent supplier into a system that is sold to biopharma companies that use these incubators to make drugs at the end of the day. What the growth rate has been over the last three years is not determinable because of the amount of inventory that had been built up in the system. And we don't have the access to our customers' customers and how often they're running those. So we can only do what you would do if you're doing research into the marketplace. But what we do know is once we start getting orders, that means that the inventory has been depleted out of the system. And then we can get an understanding is as those orders come in, what is the actual fundamental growth rate? So it's early days.
I think the good news is two things, is that our business shrunk quicker coming out of COVID, right, because we happened to have just built a brand new plant, and we won, from a market share point of view, a significant amount of that opportunity that we monetized, which was great when it was going on. But when the market rolled over because we're a subcomponent supplier, we depleted first. Now, we're leading out. So if you look at the differences between what we're saying vs what the system builders are saying, we're being a little bit more positive just because we're basically on the front of the return of the tail at this point. But good news is it's growing again.
Just to understand, I think I was under impression that there's sort of an FDA-related expiration date.
There is.
When is it?
It depends. It's predicated upon the shipment date. So it depends. All I can say is if you look at our volume over the last two years, we haven't been shipping much. So that has been part of the depletion of the inventory.
That means over the summer, you sort of should be thinking that the timing starts being a factor there and expiration as well.
It's been a factor already.
Okay. Okay. Excellent. Just on margin, Pumps & Process Solutions segment margins sort of rode the Biopharma wave to 34%, and we're 28% last quarter. Biopharma was all organic. Where did you start your career?
Here?
No, no. Have you worked for Lonza?
Yeah. Yeah. A long, long time ago.
Yeah. I don't think people realize that. But most of that is due to the mix of biopharma. So once the margin normalizes, is it fair to think that the segment margin is something north of 30%?
I think so.
Okay. Okay. So maybe now we're going to talk about just generally mix impact. You are expecting margins to turn up year-over-year in the second quarter, which makes sense as organic volumes should be turning up. The hardest piece of the margin story, given how diversified Dover is, is the mix. Based on your current outlook, how should we think about the mix in 2024? Is it likely to be neutral to positive?
Should be positive. You're talking about full-year basis, right, not quarter by quarter?
Yeah. Yeah. Yeah. Yeah.
Yeah. Positive full-year. We're mixing up either between the acquisitions that we've done that start rolling into the P&L. We've talked about biopharma. We've talked about CO2, both of which those growth platforms that I showed on the slide are all accretive to the segment margins that those businesses are housed in. So we should mix up over time.
Excellent. So maybe we can talk about FW Murphy and then sort of segue into M&A because thematically, things are changing a bit. So FW Murphy acquisition added $120 million of revenue, mid-20% EBITDA margin. So what made this a Dover business? And what are you underwriting in the merger model for margin expansion?
We have had a longstanding presence in compression components, particularly for natural gas applications. So FW Murphy basically sits right beside us. So we've known about it. We know the customers. We know how the market works. So it was an adjacency to a position that we already have. And I would say 90% of the acquisitions that we do are adjacencies to businesses that we have. We like it that way because of the fact, from an execution point of view, we understand the customer. We understand the marketplace, that type of thing. So that was incubated over time, and we were able to do it. I think the margin's actually a little higher than mid-20s, so. And so it's accretive.
We like to buy businesses that are accretive to margin or businesses that we think that we can turn around and make them accretive to margin over time. That FW Murphy was right in Dover's wheelhouse when we think about what we do from an M&A point of view.
How should we think about sort of the opportunity set? Because it's not entirely clear what's happening with private equity. I would love to hear what your thoughts. I think you and I had a conversation about sort of generational changes in some of the private companies. What does the M&A acquisition market look to you right now?
Well, okay. We went through a period where competing with private equity was difficult just because of discount rates that were used in the acquisition models. I think that we can all understand that the air has gone out of that balloon a little bit. So that's helpful. Private equity is going to likely have to be a seller relatively soon. If you go back and you look at the timing of all the acquisitions that were made and you say the incubation period, generally speaking, is four to five years with a PE, that that is going to have to come out at some point. So that may prove to be an attractive area for us from an M&A point of view. In terms of prevailing multiples, the fact of the matter is that corporate balance sheets in the multi-industrial world are very good.
And because of that, and in a relatively benign growth environment, one would expect that M&A is probably going to be pretty good over the next 18 months because I think there's going to be when you have a combination of healthy balance sheets in a lower growth environment to the extent that assets become available and to the extent that you can get it by the FTC, I think that there's going to be some animal spirits about buying some additional revenue, especially into idiosyncratic growth platforms in the areas that we just discussed. So it's probably going to be a good year for M&A.
You did say on the call, M&A pipeline is getting better.
Yeah. No. It's got demonstrably better at the end of Q1.
What about the other side? Because I think what people don't quite appreciate, you are actively managing the portfolio. You've divested $600 million of revenue since 2017. How do you see the current market for divestitures?
For all the reasons I said would be relatively active from an M&A point of view, I think that applies to divestitures also. So I think that we've got a clear understanding of the sum of parts valuation of the different pieces of the business. So to the extent that and I think that we've done a reasonably good job of improving the margin across the total portfolio, so meaning that those individual parts arguably are worth a lot more than they were back in 2018 and 2019. So to the extent that we can monetize pieces of the portfolio that carry probably sum of parts valuation multiples that's lower than the consolidated Dover multiple, then I think that we'd have to be good stewards of capital and monetize appropriately.
Gotcha. And how do you think I guess FW Murphy, right, because there was a sale, and there was a purchase. Do you think you'll be able to execute these kind of sort of pair trades?
That's pure luck. We've got enough balance sheet capacity to do anything we want at this point. So we don't try to time exits and enters just I mean, it's a non-issue. That was happenstance.
Okay. So maybe remaining time, go to macro. The mess from the first quarter was that short-cycle demand is back, broad-based, and improving. How much of this is just the end of destocking, particularly given your action to control channel inventory vs pickup in underlying unit-based demand?
Oh, I think I said in the opening comments, at least we have clarity of end-market demand because our hypothesis is that destocking is largely done, and we don't see aggressive stocking. So what we see in terms of unitary demand by end-market, that is basically a reflection of what that.
Oh, so it's just growth, so.
What that market is actually doing. When we look at it, at the end of the day, it's not, it's good. It's growing, but it's not brilliant right now because I think we're a little bit in no-man's land of waiting for interest rate cuts that are probably not going to happen now. Is this the new normal? Everybody's going to kind of get used to it for a while. When we see where it's coming, I think that this amount of capital that's coming into these mega projects, they always take longer than you think. Here we are. It's getting to be June pretty soon. I think that's going to be more of a 2025 story than it is, like I said earlier, we're quoting and quoting and quoting.
So you can tell these projects are rolling their way through the system, but I would describe them in the concrete and rebar, that's where they are today, right? We're not there when the value-added portion of these projects start rolling through. So everybody's trying to set themselves up with, "When do I have the inventory, and when do I have the capacity in order to serve it?" And everybody's going to have their own view on that.
So yeah. So what are the bottlenecks? Because we built a fancy schedule looking at these projects. And then I think David and Sabrina reminds me they want to automate Chicago. And that's exactly right. What they heard from I think they met with 20 companies. And what they heard is like, "Hey, late 2024, 2025." But what are the bottlenecks? And clearly, you're also on the board of a large bank. So you have a very unique view of what's happening in the economy. What do you see as the bottlenecks that keep pushing those mega projects out?
If you understand the way that federal funding works, it doesn't mean that the capital just rains out of the federal government directly down to the people that are constructing these projects. It actually runs through the banking system. The banking system, we're sitting in a bank, isn't exactly firing at all cylinders in terms of being able to process loans and a variety of other things. On top of that, the federal government's great about talking about putting federal funding to work, but at the same time, from a regulatory point of view, is layering on an incredible amount of complexity in terms of permitting and a variety of other things. That's just inherently why these things take as long as they do, is it's the paperwork shuffling.
And then once that starts and once you break ground, these are huge projects when you talk about data centers and hydrogen plants, like I said, that you need to pour concrete and bend rebar for 18 months before you really start doing everything. So not to be repetitive, at the end of the day, we're trying to figure out the timing and that you want to get the timing right because you want to have the capacity that's there. Because when the market comes, it doesn't usually come slowly. It comes all at once, unfortunately. So that's pretty much the setup that we see.
But you are seeing pouring concrete and bending rebar.
We see a lot of pouring concrete, and we see a lot of rebar. So if you want to go invest in aggregates, I guess I'll make my case here. But we also see a lot of quoting going on. So everybody's trying to build up the engineering phase of building up the cost structure of these large projects.
So what's your own willingness to invest in growth CapEx? You've made the expansions for CO2 system, thermal connectors. What other areas are getting additional capacity in 2024?
I'm not going to tell you. A way we like to, we repurposed an entire plant for CO2 two years before we started building the systems because we don't want to tell anybody what we're doing, right? And we did the same thing with thermal connectors. So if you'd noticed, when you came to our investor day when we were in Minneapolis, you could have gone to see the plant, and it was a brand new plant with literally nothing in it. But we're making the bet on the come, on if we think that these products have secular growth behind them. And part of winning in the marketplace is when demand comes, whether you can fulfill that demand.
I think that if we go back and look at biopharma, I think that we built a purpose-built plant brand new that paid for itself in less than a year by getting the timing right, which, okay, we don't want COVID to happen again. But we built a plant for CO2 systems with zero revenue, and we've got 100, right? So if you try, you can't take orders for a product where you don't know where to build it. And we're a multi-industrial. These are small enterprises. The amount of CapEx bets that we're taking in the grand scheme of things are not dramatic.
I guess the last question, what are you most excited about from a margin perspective in 2024 by business?
I think we talked about them. I mean, the growth platforms, because they're organic, you're not carrying all the you can go buy revenue and growth. There's a cost to all that. You're actually buying the fundamental revenue. So you're creating value by either having it grow faster or run more efficient. An organic development, at the end of the day, is an R&D cost till you launch the product, and then away you go. So the returns on those ones that we showed on the slide should be demonstrably better from a return point of view than anything that we do from M&A.
Excellent. It sounds like you do see some growth over the next two or three years.
Yeah. We're feeling good about how the portfolio is positioned.
Fantastic. We're right on time. Thank you very much, Rich.
Great. Good to see you.
Yeah. Good to see you. Yeah.