Allen with Baird here. Thanks for joining the Dover session. We got Rich on stage, and we are going to talk through a bunch of things here. If you got any questions, raise your hand. No one ever does that anymore, but if you want to, raise your hand, and we will talk, and make sure your questions are included. You can also send me an email and make sure it gets in that way. Rich, thanks for joining us today. Sorry you got caught in the elevators.
That is all right. It is an annual tradition.
You know what? It is not the same conference if we do not, right?
Right.
Why do not we start high level here, and just why do not you give us your thoughts on how the cycle itself is playing out here? Durability, investment coming back to the U.S. Any thoughts there? We will go from there.
Playing out pretty much the way we expected it. Not perfect, especially when you have a portfolio as wide as ours. From a macro point of view, we expected North America to be good. It is good. We were hoping that Europe would be a little bit better. I would call Europe kind of flat overall, mostly, with a few exceptions [audio distortion] . North America, I mean, I am sure we will get to it is still an inflationary environment. You have to be nimble in terms of price and productivity and everything. So far, so good. We think we have managed that quite well. I think that the capacity that we had laid in certain product categories over the previous two years was well done because it has allowed us to gain share in a variety of the different product lines that we have.
That is reflected in the top- line growth, and that is reflected in the book-to-bill and the backlogs and everything else. We are sprinting towards the end of the year and beginning our production plans and everything else for next year. So far, so good.
How do you think about the durability of the growth? Less of a 2027 comment, more of a multi-year comment.
Yeah. I think that the AI build-out is sucking away, is inflationary.
100%.
There's an argument to be made that if everybody's worried about the duration of the AI build-out, if that was to slow, A, does input inflation start to come down, which would be positive, and B, if that happens, then total costs come down, and then a lot of projects that are kind of in the "I want to do them" phase start kicking off. We're not complaining about the AI build-out because we participated in it to a certain extent, all the way through the power side of it. But it's clear that it is causing inflation.
Right, just because of the amount of CapEx and the demand there. That's probably making some other portions of the market a little bit more cautious, and they're waiting for that to kind of roll off.
You have the inflationary piece to it. Are you finding that the, call it, sucking in of all the labor into that is hurting the ability to push the projects in other areas as well?
Yeah, I mean, it's tough finding labor in certain categories because speed trumps cost in some of these big projects right now. So they're not exactly price-sensitive to finding every welder that they can find, which pushes inflation and to us also. So we've had, in certain product categories, tough time finding people, and so we've had to either through price or productivity, offset that.
What about the secondary and tertiary impacts from the data center build-out, as well as policy decisions, et cetera, when it comes to the reinvestment cycle in the U.S.? I mean, I think you've mentioned before, this is one of the first times in a long time you've actually seen facility reinvestment. Maybe talk to how that's playing out and how that's a positive.
Well, I mean, the fact of the matter is, look, you've got the tariff-related onshoring, and then you've got some pretty good tax policy in terms of accelerated depreciation. So one plus one equals two here. We've been participating in that ourselves. When you look, it's not income. Basically, the tax policy on accelerated depreciation has offset all of the interest rate on cost of capital.
Got it. Yeah. So maybe talk about this in the context of your long-term growth. [audio distortion] Call it 20% of your portfolio that's in these very high [audio distortion]. Then you've got the other piece. It's actually growing pretty well, maybe not the same seculars, but still very good growth. Maybe put those two together and how you think about that in the context of your framework.
Yeah, I mean,
It feels like your portfolio positioning is towards faster growth than maybe it was a few years back.
I hope so. I mean, that's the intent. Look, on the run year, we should do 4%-6% top- line growth. We are above that right now for a variety of different reasons. In a relatively stable economic cycle, that's what the portfolio can do, and that's what our expectation is. We just went through. We do a three-year strategic planning cycle every year. We do a roll forward, and that's kind of what the numbers are kicking out right now. We haven't been historically, we've been positive price cost, but that spread has not been enormous, so we haven't been a huge price taker.
We are not really overly concerned about running into a headwind from that regard, because if we all want to see inflation come down, that's great, but then what does that mean in terms of everybody's pricing? We think we have got a pretty good handle on dealing with that going forward. Our expectation in terms of that 4% - 6% growth rate would be 1.5% to maybe 2% of price in total. What are we underwriting at the end of the day? That is just 3% kind of organic volume growth, and I think that is clearly something that the portfolio is capable of producing.
Where are you in that portfolio reshaping side of things? You have obviously done a lot of push-pull with kind of tuck-in sales lately, tuck-in acquisitions. One big one a couple years back. Where do you think you stand in that reshaping?
In the last nine years, our net spending on M&A has been $1 billion. We've basically sold as much as we've bought. That is why our return on invested capital is so high, is because we do not have a bunch of goodwill sitting up on the balance sheet at the end of the day. I would expect that to continue, but probably not as evenly balanced, but then it depends on what prevailing market conditions are. I mean, the fact of the matter is we would have liked to buy more this year, but prevailing multiples of the assets that became available were extremely high, and we could not underwrite the return case for it. I think we've mentioned it on the calls, that we came into the year with a 70/30 capital allocation bias of 70% M&A and 30% capital return. Well, that's clearly flipped itself.
Our bias now is 70% capital return and 30% M&A, and that is because, if anybody takes a look at our balance sheet, we're highly liquid, and we think the share price is undervalued.
Yeah, we've been a little surprised at how big of a spread there seems to be between public and private multiples in the marketplace right now. Maybe your thoughts on that.
Scarcity. That's it. I mean, everybody's waiting for all these so-called assets to come out of PE and everything else, and they just go into continuation funds and they never come out. If there's only three or four assets, and generally speaking, corporate balance sheets are in very good shape. Then you've got a lot of people chasing a couple assets, and that generally means lots of fees for investment bankers.
Let's switch to the current backdrop then. Anything you're seeing in the current environment that suggests you can't see sustainability of current trend line into next year?
Well, I didn't see the CPI report, but I guess
It's okay. It's fine.
North America's got to get inflation under control, for sure, right? I mean, because that's a net negative, and because if it can't get it under control, then the Fed's going to raise rates, and then the cost of capital's going to go up, and at a certain point, that has economic effects. I'm hopeful that with energy prices dropping, which is, let's not talk about the war, but just about the amount of capacity coming online, that that'll be deflationary in terms of input costs on the energy side, that maybe we can thread the needle here. That's probably the biggest worry that we would have.
Maybe let's flip that around then. The order trajectory itself is quite positive. Sequential revenue dynamics are quite positive. Maybe just talk to the pieces of the momentum into next year.
Yeah, I'm sure at some point next year, we're going to have a negative order percentage comp, and everybody's going to flip out, right? I mean, that's generally what happens when you go through an upcycle. Everybody's looking for whatever data point they can find. Clearly, in certain product categories, because of capacity constraints and supply-demand dynamics, that lead times are spreading out or lengthening out, and at some point, they're going to start to come in, which means that orders are going to drop because they've already been placed. I'm sure that'll be the new dialogue once we get into next year when we start talking about the duration. I mean, I can already hear it in the rumbling in the background of the duration of the AI build and when is it going to go negative and when are the comps going to be bad.
Just so we're clear here, we're happy with the position that we have into the AI build. I don't think that we're overtly long there by any stretch imagination. So I think that we're, like I said, I think right now, sitting here today, after going through about six weeks of an in-depth three-year rolling forecast across the entire portfolio, that we think that next year has a very similar setup to this year.
Yeah, I mean.
The parts will be different, but in total, in aggregate, a very similar setup.
Have to feel confident, though, that the orders are still outpacing revenue growth and backlogs.
I've seen October's orders, and they're good.
Yeah. Seems like a positive sign, right? Maybe talk about the margin piece, and then we'll go to individual markets after that. What's the confidence in that mid-20%s EBITDA margin as a starting point? Then a bunch of questions from there.
Look, on a stable macro, we'll get to 25%. Whether we get there at the end of 2027 or the beginning of 2028, lots of moving parts in there, but we have a clear path to get it to 25%.
Yeah. Maybe talk about the investments you're making internally on the capacity side, and then take that in both ways, right? What it's doing for you from a margin perspective, and then optimism internally.
Our highest return on invested capital is CapEx. Everybody likes to talk about M&A, but remember, you're buying 15, 16 years worth of earnings when you do M&A. When we do CapEx, sure, there's a short-term drag during the build-out phase and the under-absorption phase, but if you get it right, the returns on our organic capital are far superior than even the best ones that we've done on M&A. We spend 80% of our time on that. We've got four greenfield plants under construction right now, all behind the pieces of the portfolio that are growing, depending on the region and depending on that. We talked about why, because of onshoring and because of tax treatment and everything else, those should drive the top- line, and then returns on that CapEx should be good.
I'm perfectly comfortable with taking the headwind during the build-out phase. Let's talk about brazed plate heat exchangers because it's sexy, because they go into data centers. We depressed our margins for a period of 24 months as we built out the capacity because we were making a strategic bet that the volume was going to come, right? Now, I think we're probably 500, 600 basis points higher in margin in that particular business because now the volume's coming, and we're absorbing all that investment that we made. You got to be willing, if you're making the bets, to take the margin compression when you're investing organically. We're doing the same thing in refrigeration right now. We're closing a plant in California.
We're dealing with a significant amount of transitory costs of doing it, but when it's complete, we believe that the margin lift that we're going to get is going to be significant.
When was the last time you had four greenfield projects? I mean, plant build-outs?
As greenfield standalone plants, in my tenure, this is the first time all at the same time. We tend to do one or two a year. Having said that, we went through a whole footprint restructuring period where we were actually taking plants out. Net-net, we probably have less facilities today than we did when I first started, because I think our bias was fixed cost reduction and productivity, which drove the margins early on. So, we took a lot of plants out. When we built our business or when we bought our exposure into cryogenic components, I think that that was a total of 10 plants, and we are down to five. That was part of the synergy extraction on the M&A.
I guess the question there then is, are you viewing this as you got to the right baseline, and now you are doing something to support growth? Or does this highlight the incremental confidence you have today in the growth of the portfolio?
Yeah, I mean, in the legacy portfolio, this big plant that we are taking out of refrigeration is probably the last one. Unless market conditions change. Now, anything that we do on footprint is either going to be driven by supporting growth and/or if M&A driven.
Yeah. That makes sense here. Then, maybe switch gears to some of the end markets. Maybe talk to where you play in the cryogenics and gas side of things, and the various points that make that a faster growth market for you in the short- term.
Okay. We spent about $1 billion building a position in cryogenic components. So, these are highly regulated valves, vacuum-jacketed piping, anything around cooled gas, anything from CNG to LNG, you name it. So, that's been doing really well because of the build-out in LNG and CNG and propane as an energy source. So, we've been doing quite well there. That particular technology also goes into space launch, and that's been doing really well for us over the last year and a half also. So, that side. We also are a material supplier to the internal components of both gas and steam turbines, which I don't have to tell you has been doing quite nicely in terms of its growth rate. We're also a material supplier into natural gas compression.
That has been doing okay, but it's one of the mysteries in life of there's a lot of turbine orders. But the pipeline construction to deliver the gas to those turbines is lacking. We would have thought that we would have seen a lot more of that growth this year. It looks like it's spilling into 2027, and whether that's permit-related or whatever, hard to tell. But just in terms of the energy complex, those are our real two big exposures, is on the cryogenic component side and then on internal components for turbines and compression.
When you think about the biopharma medical piece, saw that sharp rebound. How are you thinking about those end markets in the next year? Any change in the trend line?
I think the growth will slow because we went through a period of big COVID growth, then the ex-COVID collapse, then you had the inventory wind down, then you had this, "Oh, wait a minute, there's no more inventory in the system anymore." So here it comes out of the gates and grows like a weed, which was great for us. Now, I would classify this year is that is on-the-run consumption. Meaning inventory has been balanced. It got balanced in 2025. The growth that we're seeing in 2026 is just, these are consumables. So, it's just that's what the natural growth into the sector is right now, what we're printing now. So, I don't expect it to hopefully inflect some more positive, but I don't expect that 2026 is a reflection of that, a build-back of inventory into the system.
No, that makes sense. Then, maybe more broadly in your Pumps & Process Solutions segment, what are you seeing from a general industrial perspective or maybe the less exposed markets to some of those high-growth areas? Are you seeing a rebound there that could be sustainable?
It is steady, I guess is how I would determine it. I think that unit volume is slightly up. I think there is a little bit of positive mix in there, and that is a segment that we can always get a couple points of pricing, a point and a half of pricing. So I would call it steady, but not in kind of inflection of growth.
Would you make that comment more broadly to the general industrial-exposed areas of your overall portfolio?
It depends. I mean, in polymer processing, I think that that market has been down. This is year three. We are actually lapping the end of that headwind there. It looks right now, knock wood, that quoting and order activity is beginning to improve. Hopefully that becomes a tailwind in 2027. The balance of the portfolio on the retail fueling side is doing great. I think we called that at the beginning of last year to be a three-year cycle. We can add another year to that three-year cycle, so it is actually a four-year cycle now, which is good. On printing and ID, business grows 2%-4% every year. The management team has really done a great job on margins, so those things, we are up close to 30% now in that particular business.
That ends up being a cash engine for the group at the end of the day. I think we have talked about heat exchangers. Sure, the rate of growth will slow. I mean, we are in the 40%s right now, but we have got capacity coming online for another 20% capacity addition by the time we get done with it in mid-2027. Then refrigeration is purely a margin story going into next year.
Yeah. You mentioned the SWEP business, the heat exchangers. Even more broadly, talk about the data centers, semi-exposure you have in the portfolio. You have gotten a little more with SIKORA, right? You have built that out in a specialty way. Feels a little less CapEx tied, a little more run- rate than some of the others, but still kind of some CapEx association. So, how are you thinking about the dynamic there and durability?
Yeah, I mean, the direct exposure that we have to data center is thermal connectors and in brazed plate heat exchangers. The ancillary exposure we have is on the energy side because what is driving a lot of the energy build-out is to feed the data centers at the end of the day. Look, I think that we have been pragmatic about the capacity build. I think that we have got a really good idea on the brazed plate heat exchanger side of the transition of the volume between the central cooling systems and the CDU demand over time and how the volumes will change there. I do not think that we are going to run into a problem for overbuilding capacity. I think that, like I said, I think we have been pragmatic there.
I think we have got some opportunity potentially of if the demand of cooling gets to the point where water is insufficient to cool and we move into cryogenic cooling, that is a position that we have already established that we talked about. So, we are carefully looking around opportunities there.
What about fueling dynamics outside of some of the gas business we have talked to, more the traditional build-out there seems healthy. Your customer base is expanding. How do you feel about that?
Yeah, like I said, I mean, we thought we're in a three-year cycle. We've added another year to it. It's funny, like sometimes when you have capacity constraints in the marketplace, it actually lengthens the duration of the opportunity, and that's kind of what we have, at least in North America on the fueling side, where you can't get the underground tanks. So that has slowed the implementation of meeting those requirements, and actually that's good for us because we wouldn't want one of these, what we went through with EMV, where you get this one-year bubble and then the comps are bad and everybody loses their mind about it. At the end of the day, the market is pretty much a duopoly at this point, and so everybody behaves and the margin opportunity is actually quite good.
Are you thinking about buybacks in the short- term? You've obviously shifted or inverted the percentage you were expecting to do this year. Any reason that pace doesn't continue in the short- term?
No reason.
On the AI side of things, how has the internal implementation changed this year versus last year, and anything notable about where you're spending your time on that?
Yeah. I mean, this is the big. Everything that we've spent on AI this year, we've paid for with cost reduction because the early adoption for AI has been in coding. We've paid for all the tokens that we've created this year by reducing our headcount amount in programming. That is kind of the early adoption, low-hanging fruit. Now we're going to get into the more complex applications, whether that be at the factory floor or in customer management and a variety of other things. I would expect our net spend to quintuple in 2027, and we're working actively on ways to basically pay for it so it's P&L agnostic.
You referenced earlier pricing. You weren't a huge price taker. You don't feel particularly worried about the ability to get some level of price in the next year. So fatigue doesn't seem to be an issue. Maybe more broadly talk about how you're looking at price-cost dynamics into next year, and your ability to kind of manage that push-pull.
Yeah. Well, I mean, I do not know where we are on copper today, but it has been quite the ride this year on commodity group metals. I think that we, knock wood, made some good decisions about going long into this year. That helped quite a bit. Look, at the end of the day, I think we will have winners and losers as we go through the year, but net-net, I think that we will not be negative price-cost going in unless something spectacularly strange happens.
Last one, how do you think about inflationary versus deflationary optionality next year?
If we get deflation, it is going to be because of energy cost, because that is an immediate reactive. The rest of it, even if the trend was to start to move lower on everything else, it will take 18 months on the way out, just like it took 18 months on the way in.
Got you. Please join me in thanking Rich for his time today. Management will be available just around the corner over there for breakouts. Time.
Thank you.