Everyone for being here this morning. Dover Corporation, Rich Tobin, Chairman, President, and CEO. Thanks very much, Rich, for being here. Maybe just start off, perhaps, with kind of how you see the current demand environment. I think your orders' growth has been very good the last couple of quarters. Maybe explain some of kind of the drivers there. Do you think it's sustainable?
Yeah, sure. I think that our orders inflected positively in the back half of 2024 for two primary reasons. I think that the short-cycle business by itself, it started up in preparation to what everybody thought would be a decent growth environment once the elections had—that was going to go, and then in specifically to our, our portfolio.
Mm-hmm.
We had a couple businesses that had been through a counter-cycle or a down cycle, and that has come back the other way. This whole burn-off of post-COVID inventory, everything that we've discussed multiple times. So, overall, we're pretty pleased. I mean, we gave out guidance early this year because of the fact that we had a pretty sizable disposal in the beginning of the fourth quarter of last year.
Yeah.
Just to level-set everybody where we are with disc ops and everything else, we thought it would be prudent to do our 2025 guidance. We didn't change it between October and the end of January when we posted results. I mean, arguably we could have changed it a bit because FX is running against us in terms of translation of about $100 million in revenue and $20 million worth of profit on FX calc - the calculation on FX between October and January. But I think that we had enough headroom in our guidance to just absorb that for the time being. And as you mentioned, you know, our portfolio generally, the, you know, significant amount of our profits we book in Q2 and Q3.
What we really look for in Q1 is order rates because that's generally a precursor about the activity that we'll get for the balance of the year. You know, as an update, I mean, January's closed and the order flow or the order rates that we saw in Q4 have rolled over into Q1 so far, so far, so good.
Good. And on that point on, you know, the businesses that had that headwind around post-COVID inventory normalization, you know, I guess you had SWEP, around heat exchangers, you know, Belvac and can shaping, MAAG around polymer processing. And I suppose we'd have a sort of the 1/2 or 3 1/2 business would be, the Vehicle Wash , which has had a tough time more around interest rates than anything else. You know, how quickly do you see each of those getting better kind of from here?
They've all got specific drivers to them.
Yeah.
Belvac is basically 100% levered towards can making CapEx. We don't expect that to come back materially in 2025, but we don't expect it to get worse either.
Mm-hmm.
From a comp point of view, I think we've lapped it at this point. MAAG should grow some in 2025. SWEP, I'll leave it to all the forecasts of everybody that's at this conference from heat pumps. I mean, I think you've heard the answer.
Yeah.
A hundred times here. I think that what we can say is we're—we cut production relatively heavily in Q4, so our inventories are down, and that also allowed any inventories into the system to be depleted.
Mm-hmm.
When that restarts in demand, I think it's an open question. I'll say what everybody else is saying. We expect to inflect positively in the back half of.
Yeah.
2025, but I think it's a wait and see right now.
Yeah. I see. And then Vehicle Wash, it's sort of what?
Vehicle Wash never really went down. It just was something that had been growing quite nicely. I think the good news there.
Yeah.
As we held some pretty healthy margins despite kind of a boring top line there. The better news there is what we had, the underground equipment for Fueling Solutions , which is in the same segment.
Mm-hmm.
Has been down for a couple years because of inflation and labor-related issues, coming.
Yeah.
Out of the COVID. That's a, you know, very lucrative business to us. And I think we saw some pretty positive stuff there with cycles through. That's a makeup for the segment.
Great, and if you think, kind of across the businesses, is there any delta in terms of, say, aftermarket activity versus greenfield projects, or it's really vertical by vertical you have to go through?
You almost have to go vertical by vertical, at the end of the day, and, you know, like in the Fueling Solutions group.
Yeah.
The number of gas stations in the country is actually shrinking, but the size of the individual gas station. I'm sure you've seen them as.
Yeah.
Significantly larger now.
Mm-hmm.
So you can't say that that's, you know, adding capacity. It's actually making that capacity more efficient over time. And when those stations are built, it's because it's highly regulated, it's gotta be all new kit that goes in there. So you've gotta start from the tanks all the way up.
Yeah. And I think company-wide, Dover has this sort of four-to-six organic growth target through cycle. Kind of just given what you've seen, you know, since that last Investor Day, seen how the business has performed, there've been some portfolio changes. You know, how do you feel about that four-to-six% target?
Oh, I think our guidance right now is three to five for the year.
Yeah.
So I mean, I think we're putting our money where our mouth is to a certain extent on the organic side. We like the mix of what's driving that growth. It's probably 50% organic investment. So that's kind of the flow-through of R&D and some capacity expansions that we've done over the last 36 months. And then coupled with inorganic investment coming through into some what we believe are some high-growth vectors that we've been investing in. So, you know, this is the first year that I can think of in probably two or three years where we go in and take a look at the portfolio. Generally speaking, you know, a third of the portfolio is accelerating into higher growth. A third is kind of Steady Eddie and a third may be cycling down. We don't have a cycle down this year. So that's good news.
That's why we're really at the top end of the range of what we think that the growth capability's gonna be.
And I think, you know, one area that, you've highlighted as a growth area is around kind of CO2 systems. You know, maybe help us understand kind of rough scale or market share of that business. How rapid is the sort of custom?
It's been great. We have been up for many years. And in, I gotta get the years right now, the beginning of 2023.
Mm-hmm.
We brought the technology to the United States. We repurposed a facility in Conyers, Georgia. We platformed the product. It used to be an ETO. It is still an ETO product in Europe, and because it was a, let's call it a new market in terms of the United States, we decided that we were gonna just platform the product and change the dynamic.
Mm-hmm.
Away from ETO to platform. We've now successfully launched all three platforms, so the margin opportunity is significant, and from a market share point of view, we've got very, very healthy market share in this particular product line.
When you look at the sort of customers, is it a handful of very large ones driving it today across the?
It's the same customers that we have in food retail, so you know the names.
Yeah.
The adoption rates.
Mm-hmm.
Are all over the place.
Yeah.
You've got people that their business model is kind of like green, so they're kind of the leaders.
Mm-hmm.
And they tend to be the European chains, like the Aldi of the world, just.
Yeah.
Adopt CO2. Then you've got the legacy retailers that are slowly doing the adoption, largely driven by whether the states are requiring it or not.
Okay. And I suppose, yeah, CO2 systems is one of those you've highlighted as, you know, high growth, above fleet average. You know, there's a handful of other ones: clean energy, precision, biopharma, liquid cooling. You know, when we think of those each in turn, you know, how much are you adding kind of capacity-wise across them and?
We've been early on.
Yeah.
All the ones that you've mentioned in terms of capacity.
Yeah.
So for CO2, we've got a brand new plant. So we've got multiple shift potential there at the end of the day. Thermal connectors inexplicably turned into a little bit of a short-cycle business. You would think that everybody planning these big data centers would be buying the subcomponents well in advance. They don't. But we are basically capacitated for what is likely to be maybe the 2026-2027 demand presently. So it's just a question of starting up the,
Yeah.
The manufacturing cells. We did the same thing in heat exchangers for heat pumps and the like.
Yeah.
From a footprint point of view and available capacity point of view, we think that we're in a very good position in terms of being competitive from a lead time point of view.
When we think about these handful of above fleet average growth assets, what about the margin profile there? You know, as you get this above-average revenue growth, what sort of incrementals or leverage?
That's the end of the day, right? We wanna be launching, creative to the businesses that are launching them.
Yeah.
CO2 systems is a better margin product than the traditional refrigeration business. The thermal connector business is not quite at the margin of biopharma, but as it scales.
Mm-hmm.
It'll clearly be accretive to consolidated margins for sure. We'll see if it can get to the lofty margins that we see in the biopharma side. The cryogenic components, which is the inorganic investment side.
Yeah.
will be accretive to the segment. We probably got a lot to work out kind of the footprint restructuring.
Mm-hmm.
because we've made multiple, let's call it restructuring and efficiency. We'll execute all those projects. And what we see on the other side on a per-piece gross margin basis, it's going to be accretive to the segment.
When we think about firm-wide incrementals or operating leverage, again, there's been these portfolio changes. You've got high leverage this year. Do the changes you put in place make that sort of 30-ish% through cycle number look conservative or it's a good starting place?
Talking up the margins, Julian. Look, we always had 25- 35, but that was a legacy position.
Yes.
We are targeting 40 + this year, and that is a combination of mix-up on from a portfolio point of view and the fact that we've got carry forward of restructuring that we did last year.
Mm-hmm.
In any given year, if we do this correctly, we will have earnings potential of actions that we've taken in the prior year. If we do this correctly, every year we'll have somewhere between $30 million and $50 million of roll-forward restructuring benefit.
Yeah.
Which is pure profit at the end of the day, right? So that gooses the incremental margins up. And then because I think that we disclosed quite a bit of information about the segments.
Yeah.
You can see the gross margin per the segment. It's hard to convert that gross margin because you do attract some amount of cost. But clearly, by doing 40 this year, we would expect that we would convert, you know, that 25 is probably not a relevant figure anymore.
Yep. And a couple of the businesses that are, or segments, let's say, that are below the fleet average, you know, maybe start with Engineered Products, a lot of divestments there the last 18 months. How kind of satisfied are you with the shape of Engineered Products today? You've got that low 20s margin aspiration from before.
Mm-hmm.
With the sort of old portfolio. How do you think about it now on margins?
Well, I mean, at the end of the day, we can mix away. So as we grow the higher margin portions of the portfolio, it'll just dilute the weighting within the portfolio. No, but, so we're not a forced seller.
Yeah.
We won't destroy value by just selling things to make the margin look better.
Mm-hmm.
In the disposals that we did in 2004, arguably we were paid at higher multiple on those sales that was embedded in the sum of parts of our business. So that's kind of the way that we look at it. If it's not, you know, if we can get a premium to where we believe it's trading within our portfolio and we believe that it, it's gonna struggle to be accretive to kind of what our aspiration.
Mm-hmm.
Consolidated margin is, then if we have the opportunity, then we'll act upon it.
Got it. And if we look at climate and sustainability, I think that the CO2 growth is a margin tailwind. Longer term, is that a division or a segment that can do 20+% margins? Is that what you're aiming for?
Yeah, it can.
Got it.
So the traditional refrigeration business, which was single digits not too long ago, is in healthy, high teens now. And then as CO2 scales and gets larger within the portfolio, it will just drag it up on a mixed basis. So, I don't, you know, I don't think you could get the traditional in the traditional business to 25, but you can get it to 20, which is more than double than it was, not too long ago.
Got it. And on the CO2 side, good growth seems like a high profit margin entitlement. Do you see much in the way of new competitors coming in or incumbents who are behind suddenly trying to catch up?
We're not gonna be alone for sure.
Yeah.
We are all in with having a platform offering now.
Mm-hmm.
You know, arguably that's kind of a one to two-year head start. But clearly, if the TAM of this market is what we think it is, I don't think that we're gonna be left to ourselves for sure.
Yeah. But your point would be you'll have built out by then a good amount of installed base with large.
All we need to do is to have a product that, from a performance point of view, works. We've got one of the largest installed bases in Europe. So from a confidence of execution point of view, I mean, does the product work? 'Cause it's a new technology in the United States.
Yeah.
I think we've got a good story to tell there, and like I said, you know, for 36 months we worked on launching a platform product that we think meets everything from the smallest retail store up to the largest refrigeration warehouse.
And then, DII, it's not a business that gets much attention for some reason from investors, but I think it's been performing at a very high level margin-wise. Maybe help us understand kind of, you know, some of the strategic points you're focused on in DII.
Look, I mean, I think that it was helpful that Veralto spun out.
Yeah.
Because it gave kind of a shining light onto that business. And Veralto's our largest competitor. It is, you know, 2%-5% grower year- over- year- over- year. You know, it's the most global business that we have. So.
Yeah.
You shouldn't look at really quarterly results of that business because there's a lot of FX running through it from time to time and mix, but it always ends up at the same place at the end of the year.
Yeah.
Our management team has done a terrific job in terms of.
Yeah.
Expanding the manufacturing, the margin, that business. I don't think that we're nearly done there because I think we've just gotten way more efficient in managing the structure of a global business that was almost run intra-regionally for many years, country by country. And now we've basically shrunk that business model where we're running it as almost one global factory. And that's been the biggest contributor to the margin expansion.
And then, within Pumps and Process, you know, the way people on the outside talk about it, it seems to be it's sort of biopharma and then everything else.
Uh-huh.
But clearly inside it is, I'm guessing, not run like that. But how do you think about these? Are some of the verticals aside from biopharma where you're trying to sort of lean into?
Look, when we benchmark the individual piece, like we've got the knowledge to look at the individual piece.
Yeah.
Within the segment clearly. And when we benchmark those individual pieces, all have listed peer comps at the end of the day. And we benchmark extremely well in terms of top-line performance and margin performance, at the end of the day. You know, over time, would we consider splitting that business into.
Yeah.
Into a couple pieces? Sure. But I think.
Mm-hmm.
You know, externally reporting more than five segments gets to be a little bit messy after a while.
Yeah.
So I think we would ask for some time to scale them up.
Mm-hmm.
To the extent both organically and inorganically, and as we did that, then we would consider basically at least resegmenting to give a little bit more light between kind of the precision component side of the business and the biopharma side of the business.
Yeah. And then, acquisition-wise, you know, I think as we've seen the last two years, people went into this year saying this will be a year of, you know, great M&A activity. So far, it seemed quite quiet. Just overall M&A, particularly January was a very weak month, I think. How are you kind of seeing M&A yourself, you know, the sort of appeal and size and, and number of targets that are coming up?
There is a lot in the system that's coming. My personal view is everybody's waiting for price discovery, so nobody wants to go first. Eventually, something's gonna have to break and go. Then when it goes, everybody's gonna find out whether we're back to no free money 2020 multiples or if there's some rationality in terms of the multiples. But the asset's gotta come at the end of the day. There's some larger ones in there. I mean, I've been in the press a couple ones the last couple days. That's probably not for us.
Mm-hmm.
We'll likely stay in the up to $800 million-$850 million. I mean, we look at everything at the end of the day, and if we found something that was super compelling, then sure, we would consider it. But the likelihood is there'll be a, you know, we would look at a series of bolt-ons on our kind of higher value vectors that we have, so we'll see. I'm just as interested as everybody in this room is interested to see what trading multiples are gonna be in 2025.
What's the appetite to kind of move outside of where Dover is right now? I mean, you've got, again, those sort of half dozen high organic growth verticals where you've added organic CapEx, you know. Would you put more M&A money into those or perhaps think about adding a seventh or eighth high organic growth leg?
Yeah. Look, at the end of the day, Dover Corporation doesn't buy companies, right? Our companies are the single source of identifying targets that we're interested in. And they tend to be either competitors or adjacencies to established positions that we have. A lot of companies that go to auction, we, you know, we dabble in them, but we don't participate in them in quite a bit. Number two, we know the companies because they're either competitors or adjacencies. And from an execution risk, you know, the company within the Dover portfolio needs to be able to absorb the target, right? I just can't. It's not like I'm buying things and saying, "Well, this is a great idea. You go run it," right? I mean.
Mm-hmm.
We're very cognizant of execution risk in M&A, so we want the way that we believe that it works is if we have conviction at the lower level and that company is large enough to absorb the target. Generally speaking, it tends to go reasonably well, knock wood.
In terms of business model, let's say, aside from brands close to ones you own already, you know, should we expect anything more in the way of a push towards recurring revenue or, dare I say, software or?
Mm-hmm.
Sort of precision components is the preferred?
Yeah. I think the highly regulated precision components with established positions.
Mm-hmm.
Where performance outweighs price sensitivity is kind of the challenge. We'll do software deals, but they tend to be add-ons that add value to existing positions as opposed to, "Let's go buy software because it makes our gross margin go up." We're not a software company, so I can't sit up here and say that we know how to operate a large-scale software company. We just don't have that expertise.
And the point around sort of deal size, that's partly, I guess, what it's a function of the market niches that you're in, that they tend to be fairly small, a handful of players. So there's kind of an automatic limit on the size. Is that the way to look at it?
The vast majority of the companies that we compete with are private companies. I mean.
Yeah.
There's a lot of public companies we deal with, but you know, if we really tear it apart, and we like to compete with private companies because we think we have a distinct advantage in terms of cost and productivity versus private companies.
Yeah.
We also like small TAMs, because we think a small TAM with a concentrated supply base is ripe for getting high margins if you do it right. So, you know, that business model works for us because we're not competing with a lot of assets that are coming because everybody wants a large TAM, and you know, to make the argument of, you know, "I can gain market share because the TAM is so large," I think we look at it a different way that we like it when the TAM is small and we can dominate that TAM, if we do it correctly.
Got it. And when you look around, say, you know, the broader industrial landscape, you know, every quarter, it feels like someone's announcing some separation, whether under internal or external motives. You know, I guess sort of Dover's had a decent re-rating recently, but, you know, any thoughts from you around the merits of larger divestment or spins?
You know, look, it's part and parcel to be in the multi-industrial world, right?
Yeah.
It's a constant chatter in the background. You know, I don't think that we'll stick to the playbook that we have. I mean, to the extent that we scale up and we get larger, but at $8 billion in revenue, to do a spin and shrink to unlock value, I think it's a tough argument at our particular size. I mean, there's a significant amount of stranded cost associated with that. So it's never say never, but I think right now that's really not. I mean, we run the numbers.
Yeah.
To beat the band. So, I mean, we're very well aware of a variety of scenarios of spins and sales and everything else. I think at a current scale, it's gonna be the playbook that we showed over the past year. We're not afraid to divest and get smaller as long as we can create value doing it.
Mm-hmm.
But I don't think that we feel that we have some urge to simplify the portfolio presently.
Perfect. Well, with that, we'll switch to the audience response survey. So first question, do you currently own shares in Dover? So,
I need opportunity.
Right. 60% no. Secondly, what's the sort of general attitude to Dover at present? So 60%, positively inclined. Thirdly, it's around through cycle earnings growth for Dover against the multi-industry average. So in general, sort of 60% in line. Fourth question, it's around usage of excess cash. So 2/3 is bolt-on acquisitions. Penultimate question is around what PE multiple should Dover trade at. So in general, around the sort of S&P market multiple. And the last question is kind of why, why should it trade there? You know, why not have a premium, let's say, to the index? So 3/4 say core growth. So with that, thanks so much, Rich, thanks for your time.
Julian.