Pleased to have Dover with us today, Rich Tobin, CEO, President, a lot of other things, Chairman. He's going to join us today. I forget, are you diving right in with Q&A? Or did you have some opening remarks?
I mean, I've got some opening slides, but they're no different than what we had in Q3. So why don't we just dive in? And then if I need to answer a question with a slide, I'll go to it. How's that?
Yeah, why don't we keep it generic then? What's the state of the union from your perspective?
Nothing different than what you've heard from across industries. I mean, I think, you know, we knew coming into 2024 that revenue growth had been flattered for the previous two years because of all the pricing that had gone into the system, and what you see now is more or less the organic unitary growth that we've seen over the past two and a half years or so. I think that there's a hope of, with the cost of capital coming down, and that will drive some animal spirits going into 2025. I think that we feel that 2025 is going to be a better unitary growth environment than we've seen over the past two years.
And so it goes back to, you know, if we go back to COVID and all the volatility and all the inflation, we go back to, you know, hopefully make a single-digit top-line growth rate, point, point and a half of price realization, and offsetting inflationary input costs with productivity over time. So kind of the, you know, the old way that it looked. And then when it comes to Dover, we can talk about kind of, that's the macro comment, I guess, the best way to say it.
Yeah, why don't we do the portfolio stuff, and then for everyone here again, if you have questions, didn't say it earlier, meant to, email me, raise your hand. No one raises their hand anymore, so I'll just make sure I look at the emails and we'll make sure we include them, but we'll do portfolio, macro, kind of current environment, how you think about it, then any kind of subset questions from there.
Okay. Portfolio, I've been relatively active on the pruning side. So if I go back in my tenure, we, you know, we said back in 2018 that we were going to concentrate inwardly, I guess, and maximize what we thought was the individual businesses were capable of doing from a margin perspective before we had discussions about portfolio pruning. I think now we're in year five. You know, we've expanded the margins of the total portfolio quite a bit. We've been increasingly an acquirer at the same time. So we're at more of an evenly balanced, you know, we've got a pristine balance sheet that allows us to acquire. And if we want to, and if we want to prune, we'll be pruning at valuations that are significantly higher than they would have been back in 2018 and 2019.
So what's the goal then, right? I mean, at the end of the day, we're trying to get rid of cap goods. We're trying to focus on, call it higher value componentry or subsystems, however you want to put it. Journey is towards an end? I wouldn't say at the end, but you're towards an end, right?
I think that the sale of our Environmental Services Group is the start of kind of a new era, for lack of a better word. So our expectation would be, you know, to use our balance sheet, well, I mean, to invest organically as priority number one, because we think we have plenty of avenues for doing that. But then from an inorganic point of view, to move the portfolio into businesses that we find attractive that have interesting growth vectors with them going forward.
So why don't we talk about what we're trying to accomplish with the gas platform? Because I don't know if people totally understand the uniqueness of the approach you've taken in that area and why you think it's such a good bet on growth and profitability.
Look, power demand is going up. I guess maybe we can just agree with that as a statement, and electrical power demand is going up, so we've made, and so you can chase electricity, right, and there's a variety, and that's becoming an expensive, crowded trade, or you can invest into what we think is going to be the primary source of the precursor of that electrical power, which is natural gas, so which is an area that we understand because we had legacy positions in that space, and because we had legacy positions, we could identify some critical components that we think are grow over time, particularly in the area of cryogenic gas, so think about LNG, CNG, that type of thing.
And so we've spent over the past 24 months $1 billion plus in acquiring companies and rolling them up to kind of carve out a position in that space.
To the point, just to emphasize, it's not a bet on one gas, right? I mean, you're going to be relatively agnostic to the sphere.
Well, natural gas is the precursor of all alternative gas-based fuel. So that's basically the bet we're making on. So it's not, you know, hydrogen gets a lot of, you know.
Press.
Press, for lack of a better word. Shore will participate in hydrogen, but the fact of the matter is LNG in terms of its size and scope and volume is far more attractive. We'll participate in hydrogen, but it's a little bit of an end game that's probably five to 10 years away.
And so maybe talk a little bit about what you're seeing from a pipeline perspective and why you're so confident the next couple of years are going to lead to some outsized opportunities for you in the market.
I mean, I think there has been an enormous amount of quoting being done. That's everything from new LNG trains through interregional pipelines to supply these LNG trains. I think that the permitting environment over the past three or four years has been not very good. There has been spending, but it's been relatively held up because of permitting. I think that there was an educated bet that maybe permitting would become easier with the recent election. I guess we'll see. Based on what we hear, it looks to be the case.
Yeah, I had one different company earlier today, yesterday; it all blurs. But they basically said, look, I think one of the challenges from our seat, my seat investors, is that you don't see all the conversations behind the scenes; you just see the end product. But there's just a ton of conversations, pipeline work that eventually will have to come forward. You agree?
Totally. I mean, if you're going to deal with the deficit, one of the ways you can deal with the deficit is economic growth. And there is an absolute massive lever to pull in terms of opening up that opportunity. So I'm reasonably assured that that lever is going to get pulled.
Back to the M&A side of things. You know, I know you've been outspoken about the amount of content in the marketplace that's going to come up for bid. Is it the type of businesses that you're interested in? I mean, talk about your actionability within the context of a lot of private equity shops, some of these private companies saying maybe I don't want to deal with another war, another round of.
The vast majority of our pipeline is in-sourced deals, meaning that our funnel is almost opposite, meaning we don't sit around having investment banking meetings and then find the opportunities and then go and try to bolt them in. All of our, the vast majority of our opportunities come from our individual businesses. They're either competitors or adjacencies that we have. And because of the size of our individual businesses, they tend to be private companies at the end of the day. Our natural competitor is privately owned enterprises and to a certain increasingly amount of PE that's been kind of rolling up on the side. So we think that because of valuations in the public markets have moved up, that a lot of assets within the PE world have stuck, can become unstuck, number one.
And publicly traded assets basically are the fulcrum for determining the valuation of private assets. So if you're a private seller and you're looking at the stock market, you're saying, well, now's an opportunity for me. So there seems to be a little bit of a confluence here. One would have thought that it would have started in 2023 because the handwriting was on the wall with interest rate cuts and everything else. But from what we can see bubbling out there, it looks like it's accelerating. We'll see how expensive some of these deals are. I estimate that we're likely to do a lot more smaller private deals than we are taking big swings at auctioned assets, which just tend to attract valuations that are sometimes prohibitive.
And it's more targeted too, right? As far as the divestiture side goes, how are you thinking then about the portfolio? I know there's going to be a restructuring of the segments coming up here, very well telegraphed. I appreciate it. But how are you thinking about what's left to do on the pruning side?
If you're not destroying value within the portfolio, even at currently or what our estimates are in the future, then we're willing to keep these assets in perpetuity. Having said that, if we can monetize at an appropriate valuation and it allows us to kind of reduce exposures maybe to from a some parts valuation basis, is never going to really trade at the consolidated multiple to the extent that that math works, then we're happy to action it. But we're not a forced seller of any portion of the portfolio. We look at it a couple of different ways. But we've got more perfect information. You know, we'll monetize from a portfolio assessment point of view, but we'll also monetize if we think that strategically that business is becoming impaired because of a variety of different reasons. The customers are concentrating, the competitive environment's changing.
So we'll action those also. So it's not just purely go buy high margin business and sell the low margin businesses. It's a little bit more complex than that.
Yeah, no, makes sense. Last one on the kind of capital allocation side, external. What's the capacity set at today? And then how do you factor in buyback into this equation?
Buyback less so than in the previous cycle, right? Because at the end of the day, the yield on cash deposits is not unattractive right now, as opposed to two or three years ago where you've really got negative carrying cost of cash, so just from those economics alone, and additionally, I think that we're just a little bit more on the front foot from an M&A point of view because the amount of internal work that we need to do in the portfolio has been significantly reduced because of all the work that we've done and we've trained the management teams. They get it, they do it on their own, so it's allowed us to have a little bit more time to be on the front foot from an M&A point of view.
But I'm not taking, look, at the end of the day, if you look at the amount of liquidity that we have in addition to the balance sheet capacity, are we going to go to 100% M&A capital deployment? I doubt it, right? So I think that we'll be like we've done in the past, we'll be opportunistic on buybacks. And it's an insurance policy that we have, I guess, going into 2025.
So let's use that as a segue to growth. If I look back to the Analyst Day, what 4%-6%-ish kind of top line growth you name it, call it normal environment. We'll talk about the fact that you think we're transitioning to a normal environment in a sec here. But the portfolio moves inherently seem like they're either at the low end, making that growth profile that much more achievable or maybe even being additive to the growth. So maybe put the growth profile in the context of some of the recent moves you made on the portfolio swapping almost, right?
I'm going to take a guess that maybe I can blame Jack if it's not in here. Oh, there is. I think I would look at it this way.
Now you can compliment Jack then, right? So you can do both ways.
We're going to do, you know, top line growth, relatively modest top line growth this year. We knew that coming into the year, quite frankly, because we had some of our either longer cycle business that had been working off backlogs that had been built in the previous year. So that was going to be a headwind coming into this year. And we've known that's been coming for a couple of years. Let's not get into heat pumps for a moment. I'll take any questions on that in a minute. But so we knew that was coming. So we had been investing. And in these particular cases, that's almost 100% organic with the exception of clean energy components, which I referenced before, to try to deal what we knew in terms of the accordion effect of the portfolio.
That runoff of that backlog in 2024 is three or four hundred basis points of growth that we had to offset this year, right? And that's kind of why we have a modest growth rate this year. I'm not aware. We believe all the three on the right side of the slide have bottomed. We don't have that headwind going into next year. Even in, I characterize this year to be a relatively low growth environment and unitary demand. If we get to a modest level of kind of the macro, then it doesn't look Herculean based on the track record of the portfolio this year.
The moves you made have concentrated you on the left side of the panel.
What's that?
The moves you've made have concentrated you on the left side of this panel.
Yeah, yeah, yeah. The CO2 systems, the thermal connectors, the biopharma, and the Precision Components were all organic capacity expansion or product introductions. Clean energy, as we discussed before, that is mostly M&A.
This basically is the template for why you're confident next year is normal-ish, right? As a starting point, and then we'll see what we get when we get in the year.
Generally a prudent guy, but I'm reasonably confident in terms of my view on the macro.
So if I phrase it a different way, and you look at kind of the month-to-month cadencing or week-to-week, are you at the point where you're getting more stability in the underlying patterns on orders? Is it sequentially normal yet, or is it still pretty choppy?
We went through this phase of backlog explosion because of supply chain and everything else. Then the pendulum swung hard back the other way because of all the inventory that was built up into the system. We're kind of trying to find where we are right now. I think that there's an understanding in the marketplace that lead times have shrunk dramatically. And right now, you can pretty much get most of the products that you want in a reasonable timeframe. And coupled with the fact that it's kind of a low growth environment, you know, you're book-to-bill or you're almost like a make and ship situation quarter by quarter.
If the macro improves and demand goes up, my estimation is that lead times will begin to extend a little bit, and that will be reflected in book-to-bills and backlogs and a variety of other things as we move into 2025, so we're not overly concerned right now that book-to-bills are at one or slightly below one because it's just a reflection of whatever demand's there, there's capacity to fulfill it.
The inventory side's pretty flattened out.
Inventory has all been blown out of the system. Arguably, the distributor inventory, because they know that lead times are low right now, is lower than kind of normal.
So if I think about your equation for next year, is it as simple as the 300 goes away, you still have these good growth factors, and the pieces not addressed on this slide are stable from current levels, and we'll see if they get a little better, right?
There's thousands and thousands of other issues, but if we want to look at it that way, that's a fair assessment.
Speaking of thousands and thousands of other issues, what's your early take on the election tariffs' impact for you? Any of the high-level thoughts?
We would characterize ourselves as winners the last time we went through the Trump tariffs because by and large, we are a proximity manufacturer, meaning we make the product and source the components within the region that we sell the product. Now, that doesn't apply, you know, to electronic boards and things, which, you know, the fact of the matter is all of the global capacity is in Asia. But for the most part, I think that last time we went through this, we would argue that we gained market share during that period. So I don't think it's going to be a negative, whether it's a positive for us or not. I'm not entirely sure, but I think that we're not agonizing, at least yet, about what's going to happen with the tariffs. I don't believe that Mexico or NAFTA tariffs are at risk. That's my personal view.
What worries you at this point then? I mean, it feels like if I think back over the last two, two and a half years, we've had a few more stress points. This probably feels the least amount of stress, least amount of concern points in the portfolio. I mean, agree, disagree, what's the pressure point at this point?
I mean, there's always something to be worried about all the time. That's what we're in the business of worrying. Look, you know, I think that the systems that we've been putting in and our ability to extract synergy value across the portfolio that we own. We're not done. I think most importantly, as I mentioned before, I think the management team gets it. We know how to run it. It allows us to be kind of on the front foot and being less inwardly focused to allow us to be a little bit more outwardly focused.
So just a quick one on the margins before we transition to some of the unique end markets. Where do we stand in the margin journey here? You know, some of the puts and takes in the portfolio are going to be additive to that profile over time. The internal things you're working on are additive. Return to volume growth should be helpful. How should we think about that trajectory?
Yeah, I mean, we're in a, we just came through a two-year period of mix down, meaning our fastest growing business, we're diluted to our consolidated margin. We are now, we believe, inflecting to mix up. And that is because of portfolio moves and certain high-value portions of the portfolio that are exhibiting the highest growth. So, you know, we're endeavoring to get the consolidated segment margin to 2025. And I think that we're going to start, you know, we'll continue to track that way as we go into 2025.
All right. So a couple of end markets here then. Biopharma, how do you think about the growth trajectory there? And then maybe if China doesn't really come back, can that market grow similarly to what it did historically?
We are by no means a proxy to the biopharma market in total. I'd leave that to our clients to kind of articulate that. But we have a particular technology that is sold into the biopharma processing that we believe provides significant value. Are we going to immediately return to the solid days of COVID demand? Probably not. It's probably going to take us years to track there. But we're growing in the 20s right now after a period of shrinking. So, you know, how long is a piece of string? You know, I think for now, we're confident that our biopharma business is going to grow quite well into 2025.
Is that core end market growth just inventory levels, meaning that you're finally doing sell-in and sell-out? Is there an expansion component to it? Because I know those things do tap out.
There was, and I think that that's all in the rearview mirror, so the channel inventory, whatever the definition of channel inventory is, it's all flushed, and there was a, you know, you can't keep that in, you can't keep that product in inventory forever. You have to, it basically becomes invalid after a while, but that's kind of behind us. The demand that we see right now is that bioprocessing equipment systems that have been sold that are operating, operating out there, so we're not levered to new systems as much as we are as the systems that are running. Every time you change a batch, you have to pull off all these components. They're single use, so it's just as long as the biopharma industry in total processes, then that is what's driving consumption.
Nope, makes sense. Imaging side, some leading indicators there are turning a little more positive. Do you think that has systemic legs, or is this just a little bit of a catch-up from some underinvestment?
Yeah, I mean, if you look over at a period of time, it's, you know, mid 3-5% growth. You know, it's got some pricing power. So you probably get a point and a half or so of pricing out of it. We think we still have some margin opportunity. If you go back and take a look at the margin performance of that business for us, it's actually been quite good in a relatively low growth environment, and we think that has still got some headroom. In terms of M&A, there's adjacencies around there, but, you know, because of the concentration of the market. But it's a high-value business that we think we will just continue to be a steady eddy and perform. And every dollar of additional revenue contributes to the mix-up of the total portfolio.
Absolutely. Heat exchangers you mentioned earlier. I mean, you look at the data coming out of Germany as an example. It's bottomed, right? I mean, it can't get much worse.
True.
Is there a true recovery behind this, or is this at least we found the bottom, and then when the recovery hits, then we're in a better spot?
The diversity of opinion between the market participants, I mean the people that build these actual heat pumps, is quite wide. I think it's fair to say right now, so we shall see, right? We are a subcomponent, a critical subcomponent that gets delivered into heat pumps at the end of the day, and we've got the capacity, and we've got the market share and everything else, but I think that we'd like to wait until all the market participants opine about what they think about 2025. We got fooled before. This is the best way to say it, so we'll allow the end user to say what they think about growth. It can't go lower.
Yeah, yeah. At least at a minimum, it's flown along the bottom.
Right.
So, the thermal connector piece. Got a question here. You know, I know with the gas platform, you talked about how you are at the front end of that curve from an electrification perspective. Does the thermal connector piece tie into the data center side, and what kind of application might that look like if so?
It is basically the connector that is attached to the cold plate that delivers the cooled water to the chip. So it's interesting. You know, our biopharma business is actually a connector business by its nature. It just happened to be really successful in biopharma, so it ended up almost being called a biopharma business. But it actually is a connector business at the end of the day. From an engineering and product development point of view, it's a connector business. We've been a supplier into supercomputing for years, who are the ones that actually developed liquid cooling that has basically moved over to the NVIDIA chip stack. So we were almost like the incumbent in the industry of liquid cooling. So to the extent that it's now moved over into these big data centers, you know, we're prepared. We built a bespoke facility to accommodate this product line.
So we're ready to go in terms of the demand. The demand, as you can imagine, you know, albeit small numbers from a starting point of view, is quite robust.
Any thoughts generically on short-cycle dynamics versus more project and CapEx dynamics? And I'm kind of asking the question from a, what are your customers saying on the content projects and getting those to move forward more aggressively versus in compare and contrast to kind of the short-cycle commentary they might have or the buying patterns they might have?
Yeah. The constraint for project-related businesses up until the beginning of this year was labor availability and labor cost. That is largely unwound now. And that's where you're seeing markets like in, you know, refrigeration, you know, store remodelings, right? That inflected a year ago, and you can see the volume growth that we got there because you can actually run projects and do them on time and at cost, where in the previous two periods, every CapEx project that anybody ever did came in late and over budget. So because of a variety of different things, that's largely unwound. And that's why our CapEx kind of levered businesses are actually doing quite well.
The bigger, longer-tail ones, like we talked about on the clean energy side, just because of the data center side, because of the complexity, you just got to see through all of the early hype of announcement, announcement, announcement, and just understand that those projects go through what we call concrete and rebar phase for about a year before anybody starts ordering the subcomponents that go into those projects. So we're kind of making our way through that phase right now.
Well, please join me in thanking Dover and Rich for their time today.
Pleased to have Dover with us today, Rich Tobin, CEO, President, a lot of other things, Chairman. He's going to join us today. I forget, are you diving right in with Q&A, or do you have some opening remarks?
I mean, I've got some opening slides, but they're no different than what we had in Q3. So why don't we just dive in? And then if I need to answer a question with a slide, I'll go to it. How's that?
Yeah, why don't we keep it generic then? What's the state of the union from your perspective?
Nothing different than what you've heard from a.