Q3 2022 Dover Corp Earnings Call
Please standby your program is about to begin.
Good morning, and welcome to Dover's third quarter 2022 earnings Conference call.
Speaking today are Richard J, Tobin, President and Chief Executive Officer.
Brad Sarahpac senior Vice President and Chief Financial Officer, and Jack <unk> Senior director of Investor Relations.
After the Speakers' remarks, there'll be a question and answer period, if you'd like to ask a question. During this time. Please press star one and then the number on your telephone keypad, if you'd like to withdraw your question. Please press the pound key Oh, sorry start U S.
As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms. Please disconnect at this time thank.
Thank you I would now like to turn the call over to Mr. Jack Dickens. Please go ahead Sir.
Thank you Gretchen good morning, everyone and thank you for joining our call.
An audio version of this call will be available on our website through November 10th and a replay link of the webcast will be archived for three months.
Dover provides non-GAAP information and reconciliations between GAAP and adjusted measures are included in our Investor supplement and presentation materials.
Are available on our website.
Our comments today will include forward looking statements based on current expectations.
Actual results and events could differ from those statements due to a number of risks and uncertainties, which are discussed in our SEC filings, we assume no obligation to update our forward looking statements.
With that I will turn the call over to rich.
Alright, Thanks, Jack and good morning, everyone, let's start with the performance highlights on slide three.
Dover delivered revenue growth and margin improvement in the third quarter, driven by rigorous execution and improving price cost dynamics.
But were offset that more than offset the impact of supply chain challenges inflationary cost pressures and foreign currency translation.
Demand remains constructive across most of the portfolio with four out of five segments posting organic growth in the quarter.
Backlog at $3 $2 billion was up 12% year over year and remains approximately double the historical levels relative to revenue driven by continued strong demand across many end markets.
Supply chain challenges that we've endured over the past 18 months continue to improve which has allowed us to reduce our backlog this quarter through increased production performance.
It is our expectation that this trend will continue for the balance of the year, our supply chains and lead times normalized.
Despite the building macroeconomic uncertainty, we are deploying capital to drive productivity and expand capacity in several businesses that are expected to deliver robust growth on secular tailwind.
We closed on the Malema engineering acquisition in July , which adds a great technology to our Biopharma portfolio and we are continuing to pursue attractive bolt on acquisitions. During the quarter. We also announced an accelerated share repurchase program to return $500 million of excess capital to shareholders.
We're driving sufficient liquidity for value creating investments.
While the current demand conditions are solid our management posture reflects growing caution with the macro economic outlook as such through the balance of the year will be proactively reducing output in several businesses to draw down inventory balances and initiating cost containment measures where appropriate.
Our business model is flexible as our 2020 performance has proven we firmly believe that ongoing improvements in the supply chain and available production capacity will allow us to match production to meet demand wisdom within prevailing lead times in Q1 of 2023.
We are adjusting our full year guidance to reflect the negative translation impact of foreign exchange on our revenue and earnings.
The estimated full year impact of foreign exchange to EPS is approximately 37 per share with notable acceleration during the third quarter as the dollar rallied against most of our trading currencies.
Let's skip slide four and move on to slide five all in all the quarter developed as we expected capital goods portions of the portfolio delivered strong top line and margin expansion on the back of strong order books lower input cost cycling through inventory as well as pricing actions taking hold.
Engineered products revenue was up 18% organically in the quarter on broad based strength across the across the portfolio and major geographies as well as pricing actions.
Margins were up 250 basis points year over year as our capital investments in productivity begin to show results and our investments in ecommerce platforms drive aftermarket volume we.
We expect expect margins to continue their upward trajectory through the balance of the year on solid volumes and improving price cost dynamics.
Clean energy and fueling was roughly flat on an organic basis revenue performance was up and clean energy components vehicle wash fuel transport and below ground retail fueling, but was offset by lower shipments in order trends in above ground retail fueling driven by customer construction delays in North America as well as overall caution among op.
Operators in Europe , and Asia as a result of the weakening macro environment.
Margins in the quarter were flat year over year, as our clean energy margin mix and decisive cost actions were able to offset the reduced volumes and fixed cost absorption in the above ground dispenser business.
During the quarter, we began to take.
Cost reduction actions in our dispenser business.
We are in part enabled by the global product platform harmonization and complexity reduction work that we've completed in the past 12 months, which enabled us to reduce our European dispenser skus offering by over 50%.
These actions will continue through the first half of 'twenty three and will result in meaningfully improved operating margins going forward.
In imaging and identification volumes for our marking and coding printers and spare parts recovered well on improving electronics input availability as well as the roll off of Covid Lockdowns in China from the prior quarter.
Pricing actions and consumables and service demand were positive contributors in the quarter and FX is a negative headwind to absolute revenue and profits in this segment given its large base of non U S dollar revenue.
Q3 margins in imaging and I'd say were very strong improving 230 basis points, driven by pricing actions products product mix richness and improved operational efficiency.
Pumps and process solutions posted 2% organic growth, we saw solid performance in industrial pumps medical and thermal connectors polymer processing and recycling and precision components as expected the biopharma components business, which delivered peak revenue in Q3 last year on Covid vaccine demand declined year over year.
During the quarter as the bio in Biopharma industry continues to pivot from Covid vaccines to a growing suite of biologic therapies are non biomedical and thermal connector business has grown 30% year to date, driven largely by demand in data center and electrical vehicle charger cooling applications.
On the back of this demand and forecasted demand we are finalizing the commissioning of a new assembly plant.
Minneapolis area in Q4.
Operating margin in the quarter remained robust at approximately 30%. Despite a larger proportion of revenues from industrial products and from improved volumes pricing and efficiency programs across the segment.
Topline in climate and sustainable technologies continued to be strong posting 19% organic growth on solid volume and pricing actions across all businesses and geographies all.
All three businesses have significant backlogs into 2023, our capacity expansion programs and <unk> systems and heat exchangers remain on schedule as we continued to invest behind areas of secular growth beyond 2022.
Margins were up 500 basis points in the quarter on price and strong volumes materially improved productivity in food retail as a result of capital deployment projects.
And product complexity reduction and improved portfolio mix, and can making equipment and spares and heat exchangers I'll pass it to Brad here, Thanks, Rich and good morning, everyone. Let's go to slide six.
The top right shows our organic revenue growth of 9% driven by increases in four of our five segments.
FX was substantial at 5% or 97 million headwind to our revenue growth as well as our profitability, resulting in 11.
<unk> of negative EPS impact in the quarter.
Changes in foreign currency translation from our last guide in July and till today are estimated to have an incremental impact of approximately <unk> 10 to.
Our full year EPS.
M&A contributed $55 million to the topline in the quarter a product of 89 million from acquisitions, partially offset by $34 million for my divestiture late last year.
We saw solid organic growth across our major geographies. The U S. Our largest market was up 11% organically in the quarter.
Europe was up 9% and all of Asia was up 13%, China, which represents approximately half of our business in Asia posted 8% organic growth this quarter up from a 4% decline last quarter as our businesses recovered from Covid, driven lockdowns that impacted our ability to produce and sell as a country.
<unk>.
On the bottom of the chart bookings were down year over year due to foreign currency translation improved lead times across several businesses.
Our cash flow statement is on slide seven.
Free cash flow through the first three quarters of the year sits at approximately 300 million down year over year on capital expenditures investment timing of tax payments and performance payments, but mostly unplanned investments and working capital.
We have been carrying elevated raw materials and components inventory levels throughout the year reflective of our high backlog levels and inputs or shortages as well as higher receivable balances on growing sales.
We are actively working to bring down our inventory through the balance of the year and expect to further liquidate our working capital position with a degree of cash generation also dependent on the timing of collection of receivables.
We expect we expect free cash flow generation to significantly improve in the fourth quarter, which is historically, our highest cash flow quarter of the year. However, the exact timing of working capital liquidation may take into early 2023.
With that I'm going to turn it back to rich okay. Thanks, Brad let's move to slide eight.
Let's discuss the battleground items for the balance of 'twenty, two with a brand new slide demand trends of backlog.
More than a year ago, we were clear that we expect a comparable booking metrics to moderate when supply chain start normalizing and thats the story of the quarter.
Bookings were down on a year to year basis against a very high comparable quarter and backlog declined this quarter as a result of improved production performance.
Which drove the top line.
I call your attention to the middle column of the slide our backlog remains at historically high levels about double where it was relative to sales prior to the pandemic.
This was driven to a lesser extent now by extended lead times and customer, replacing post pandemic orders much further in advance than normal as a result of supply chain and industrial capacity constraints, but more importantly by strength of fundamental demand of our products and solutions in multiple markets that are indicated with green arrows on this slide.
We've talked about secular growth drivers and some of these markets previously and we continue to see robust near term trends driving events investment in these businesses.
Despite strong demand shipments were held back in the quarter in several businesses, most notably in engineered products due to hydraulic component shortages and chassis availability and in climate and sustainability due to sub components availability and capacity constraints. We are currently expanding capacity in both <unk> systems in the United States and heat exchangers and <unk>.
Arent geographies to meet projected demand.
The portion is highlighted in Orange, we expect it to some degree but above ground fueling weakened in the third quarter as our customers have not been able to overcome short term construction delays pushing new builds into 2023.
And the Biopharma transitioned from the Covid vaccine production has taken longer than we would expect we expect both to normalize as we move into 2023 based on inventory drawdowns and reconfirmed Capex plans.
All in all our backlog remains elevated and we will continue to support that will continue to support the top line.
Additionally, our backlogs give us confidence and visibility to plan, our production efficiently and as I mentioned earlier will allow us to manage our working capital by flexing production performance to quarterly demand today about 70% of our Q4 revenue is already booked and we have a solid foundation of booked business carrying to 'twenty three that you can see on.
Slide by segment.
Highlighting the healthy mix of short and long cycle elements of the portfolio.
Go to the bridge on slide nine here shows sources of value creation will lead us to a forecast double digit EPS growth. This year, we expect to significantly offset much of the 37 cents of FX headwind. This year through strong execution and cost controls. We are conducting short term cost containment measures where appropriate but more importantly, we are.
Beginning some fundamental cost actions in our clean energy and fueling segments.
The 2023 full year EPS accretion from these actions is expected.
Expected at approximately <unk> 23 per share we have additional cost actions underway, which will update on the Q4 call.
Between our current in flight restructuring activities and the share repurchases completed this year expect a solid foundation of EPS carry over benefit into 2023.
As we prepare for various macroeconomic scenarios next year, we're confident in our portfolios ability to outgrow and out execute in our respective markets. The niche markets that we participate in are attractive and structurally sound from a competitive point of view our.
Our investments in back office consolidation e-commerce platforms and plot and product line complexity reductions are providing us a multiyear runway to further reduce our fixed cost structure and variable costs, while enriching the customer experience.
Organic and inorganic growth, we have re scaled silver.
Since the spin in 2018, which provides us increased optionality for the portfolio decisions as we continue our value creation journey.
In closing I'd like to recognize that we have been pushing our group hard this year and I want to thank my colleagues around the globe for their continued dedication and strong performance in a demanding operating environment and with that Jack will go to Q&A.
If you would like to ask a question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press star two we ask that participants limit themselves to question. One question and one follow up question well take our first question from Steve Tusa.
Tusa JP Morgan.
Hey, good morning, guys.
Thanks, Dave.
So you took down the total revenue by a percent I don't know, that's like maybe 10 cents or something like that of a headwind depending on how you convert it.
Do you have some buyback benefit here, that's pretty close to that.
So what what is what's the other part of the.
Reduction in.
And earnings is there anything else, that's moving around or maybe I'm underestimating the impact of revenue maybe going to the low end of the range.
I mean, I think we're taking a guess at FX for the balance of the there and we've been wrong all year.
So there's some caution related to that.
At the end of the day, we're going to build what we have in our backlog I think that we are making an adjustment to our posture somewhat.
In terms of production performance look we've been you can see in our working capital balances that we've been running excess inventory all year, because we've been kind of chasing this demand curve.
We've seen notable differences and improvements on the supply chain across most of the portfolio with some few exceptions during the quarter.
Which allows us to change our posture.
It's turned down the production performance machine in Q4 somewhat lets liquidate working capital because you know what I.
I'm confident that we can restarted in Q1 and push that production performance into next year. So we get the benefit of the reduced working capital this year and we get the benefit of the production performance in 2023, I think it's the prudent thing to do I'm not going to make any comments on what we think about 'twenty three demand yet wait for next quarter to do that.
But clearly.
We have some caution in terms of what's going to develop in the marketplace I fundamentally disagree with what the fed is doing now they say that their data driven but if you look at our results themselves logistics costs raw material costs have all come down.
So the inflation that we had seen over the past 18 months is coming down, but if they are going to continue and they believe that their data driven well I don't think that we've seen now the impact we see it in housing now the impact of increase in rates. So if they're looking for demand destruction that we have absolutely no other.
Posture than to accommodate that by lowering our inventory balances and moving that production into next year.
So I think it is.
Good News Bad News story, I think we get the working capital in the casual this year, which under the under the trajectory. We're on right now we would have been pushing that working capital liquidation almost exclusively into 'twenty three we can pull some of that into 'twenty two.
So basically it's kind of like a bit of an under absorption in the fourth quarter as you kind of turn that production down.
That's correct that differently.
Okay, and then one last one if that's right.
What will what will price cost to end up this year and if you kind of snap the line at all that you know what what does it end up looking like so far next year I'm sure. There's some pricing was a little bit better than expected. This quarter, maybe there's some carryover of price into next year as well.
Yes price cost that you can see it you know we had been saying all year that in the capital goods portion of the portfolio because of the inventory balances roll forward and because of the exposure on raw materials that we expect the back half and take a look at the at the performance on engineered products.
And and the refrigeration unit I mean those are.
Largely as a result of the dynamics that we discussed in previous calls we don't see any pushback right now in terms of pricing, but I think that that's going to be reflective of demand. We go through and more importantly that pricing wasn't there in the first half of this year. So if everything holds firm we get a pretty good credit from a comp perspective.
Going into the first half of 'twenty three.
Okay. That's positive price cost next year, you would expect.
I expect to have positive price cost in the first half of next year, assuming that demand is reasonable yes.
Okay, great. Thanks, a lot guys I appreciate it thank you guys.
Yes.
Our next question comes from Andy Kaplowitz from Citigroup.
Good morning, guys.
Hi, Andy.
Rich could you talk about the cadence of orders you've been seeing I know you recently talked about some expected weakness in above ground fueling you've talked today about biopharma continues to be a little difficult, but did you see any more signs of slowing in orders towards the end of the quarter here in October and what are your customers, telling you about how they might spend on capex going into 'twenty three.
No the only place that we've seen it are the areas that we called out specifically in the slides other than that.
We're not seeing those robust crazy numbers that we were seeing a year ago. This time, but I think quarter to quarter across the portfolio while were less than one I mean, we're at <unk> 96, it's not like we've seen a dramatic slowdown.
But what we're hearing from our customers is two things.
Those customers that are that we are providing products into capex are by and large every capex project. This year that our customers were undertaken have taken too long and cost too much because of labor availability and total inflation and so what you see now is as everybody gets more cautious about demand in 'twenty three.
<unk>.
That theres almost this view of what.
We're going to push some of this demand into 'twenty three we're going to finish what we got in flight and then we're going to see where we are that's the signals, we're getting particularly in the above ground fueling side.
On the Biopharma side I'd just call your attention to all of our customers results I will tell you that we started.
Reducing product into the channel much earlier.
And we provide a consumable products. So I wouldn't take a look at some of the systems manufacturers and say well that's a direct proxy I think that we are a little bit of ahead of the curve in terms of that demand and as long as those units run eventually over time, they're going to consume our products. So we think of this as a margin tailwind.
Moving into 2023, but overall Andy at the end of the day you can you know.
As I said to Steve a moment ago I disagree.
Of what the fed is doing at this point theres enough in the system right now that they're going to get what they want but if they over correct, they're gonna get demand destruction, so and all of our customers are now on pins and needles about that right. Now. So we can only do one thing is that is to prepare for.
A scenario as such and because we have a flexible operating model I think that we just get on the front foot and do in Q4, and if we have to catch up in Q1, so be it.
Rich that's helpful. And then maybe just focusing on D. C. S. T for a second you mentioned you had good visibility in all three of your businesses. Obviously, there's been some concerns around bell that maybe you can talk about that in.
What are you seeing in sort of core retail refrigeration and you mentioned sort of the extension heat exchangers all of that seems to be reflecting an improving margin there too. So how do you think about margin going forward in that business.
Well I mean, I think when we finally got to where we said we were going to get to we only took five years, but I think that Thats I.
I guess, we can hang our hat relate to never sometimes well I mean, I think we would have made it if not for the whole COVID-19 disaster, but nonetheless.
Look bell back when you look at that backlog chart, a big chunk of that is <unk>, right, so which sold well through 'twenty three.
You know at some point that business is going to have to pivot to more replacement parts, but we look at it is as the installed base has increased exponentially and the margin profile of spares versus built out units is actually accretive to margins.
Gulf of refrigeration demand is still there.
We will have the little bit of a slowdown in deliveries in Q4, just because we run into the Christmas season, when everybody stops doing construction projects, but our backlog there remains robust cotwo. We think has got secular demand behind it thats why were expanding capacity.
And heat exchangers look I mean, we're expanding capacity in every geographical region I think we talked about it before we've been the beneficiary.
I'll have a significant amount of step up in volume.
For product that goes into heat pumps, and if you look at the major manufacturers. They are all announcing capacity expansions worldwide just because of the technology change. So we feel good about it.
Appreciate it rich.
Thanks.
Our next question comes from Jeff Sprague from vertical research.
Hey, Thanks, Good morning, Hey, Rich first.
Just the comment about portfolio Optionality that you closed with obviously somewhat of a provocative statement I know you said at least one one time earlier at a conference.
I don't suppose you're going to name names on businesses or anything, but you did throw that out there. So maybe just elaborate on what you want us to think.
As you kind of laid out on the table and where things might be headed.
Yes.
It's been a couple of years since we got the portfolio questions I was missing them, Jeff So I decided to.
Secondly, then just restarted.
Look I mean, I think that when we used to get questions about the portfolio part of the answer that we gave was.
That you can be scaled to the side to the amount that we did back in 2018, and then begin talking about portfolio because you run into a scale problem. After a while so if you remember we spun off average <unk> and we had to take some significant cost restructuring to accommodate the fact.
Firm wide that absorption was going to be an issue.
When we got ask questions again about bigger portfolio. Most part of the answer was hey look there's a lot of value that we can create out of the existing portfolio, which we have.
But also.
To the to the extent that we can rescale. The portfolio then that opens up an app.
Avenue, where we don't have to worry so much about that so that's where we are if you go take a look at where we were in terms of total revenue.
<unk> spin and where we're going to close now.
We've rebuilt that scale in that mix.
A variety of scenarios more possible on top of the fact.
That the portfolio in totality is worth a lot more than it was back in 2018.
Mhm alright interesting.
Hey, so.
Maybe just thinking about bracing for something tougher as you said, maybe the fed is going to take us off the cliff here so the.
The preparatory cost actions concentrated right now in clean energy and fuel line.
Maybe just a little bit of color on how you would further prepare or if you think things are going south.
Other areas of potential restructuring, what levers you could potentially pull.
Sure.
The.
Clean energy and fueling one is a bit unique I mean, we did we were little bit surprised in Q3.
When the demand went down because all the signals that we're getting from our customers where there was.
Plenty of projects with the balance of the year.
So it basically forced us taking actions that we were planning on doing in January .
And pulling them into Q3, I mean, we've been preparing for.
A scenario around the retail fueling business.
To adapt its positioned kind of in a post <unk> world.
For years now right I mean, we spent a significant amount of money in revitalizing the portfolio at the same time, we spent a significant amount of management time, reducing the skus, which allows us in the future to make some.
Broader decisions on.
On footprint and a variety of other things so.
To a certain extent part of what we did was in reaction to that to the demand environment, but it was coming Nonetheless, I just think that we had to pull it forward by about three or four months on the balance of the portfolio I could only go back to March 20, I don't see that scenario, but I think that we've proven that.
If we have significant demand destruction that there were a variety of levers that we can pull which I don't want to Paul but I think that we have.
If you could take a look at our performance in 2020 in terms of margin preservation I think that we did quite well.
Great maybe just one quick one the 70% of Q4 in backlog, how does that stack up relative to normal.
Well I mean look if our backlog is double than historic then it's 50% more but I mean, it's all over the map depending on whether it's short cycle or long cycle. If you look at that chart right you know.
Printing and I'd has got.
Higher backlog, but it's actually quite low relative its revenue because that's a consumables consumables business. So we don't generally carry any backlog there so youre going to see a bifurcation between capital goods with longer lead times and bigger build schedules between shorter lead time theyre all up in aggregate, but.
There's different dynamics between the five of them.
Great. Thanks for the time appreciate it.
Yes.
Our next question comes from Andrew <unk> from Bank of America.
Hi, Yes, hi, good morning.
Hi.
Hey, just a question on backlog.
Go into a bunch of industry shows and it seems that some industry participants are.
Justin just how they think about backlog structurally.
The view that going forward, we will probably live with just perfectly bigger backlogs just because there's less visibility longer lead times at the same time. It seems that the industry also realizes that maybe we've heard from some industry participants sort of protecting themselves in terms of pricing.
Right. So maybe the R&R cancellation penalties could you just talk as much as you can about a how do you think about just this quarter and backlog process evolving into 'twenty three and given the fact that you do now have to probably live with longer backlog, even if you are reducing it.
If you have sort of changed the structure of the backlog terms conditions pricing anything like that big picture.
Well, that's a quite the tour de force.
Look there's nothing wrong with having backlog given the choice between having it and not having it I'd rather have it at the end of the day there are complexities.
Cities with the issue of backlog, because youre managing pricing of the backlog and if you recall we suffered at the beginning of this year, where we had a large backlog coming out of 'twenty. One and then ran into cost inflation and then we had this grand debate, whether you can reprice your backlog.
As really a competitive stack issue, whether you thought you could get away with it or not and everybody kind of did their thing.
I think that backlogs because of kind of the supply chain risk of shortening the supply chain, which I think we've been the beneficiary of I think that's going to have a little bit of an impact there. So.
But again I think it's very difficult to compare.
Company to company unless they are pure players because.
Certain businesses are always going to have elevated backlogs in the portfolio I mentioned bell vac, but mark would be the same way within our portfolio, where the build time of these products is.
90, 120 days, so you've got to get basically the orders in value before you even by the sub components of the raw materials you need to have the order in place as opposed to market in March where we don't get all worked up about backlog, because it's just consumer volume and <unk>.
Being able to price it correctly and make the deliveries on time so.
Theres a lot to unpack there Andrew I mean I think.
And because of the <unk> portfolio, we touch at all all the scenarios I think that the actions that we're taking now is a little bit of.
Caution of.
You can't look at backlog trends and then project that into 2023, Alright, I think that we're basically saying <unk>.
Supply chain is.
As caught up now the backlog that we have that we need to deliver in the back half of Q1, we can make it in Q1, so let's not make it in Q4, that's really the pivot that we're making right now.
Oh, Thanks, and Jeff I'm sure you're going to my next question.
On M&A and you know with interest rates, where they are high.
High yield markets are in flux.
How have you changed your approach to M&A in terms of cost of capital.
And what are you seeing from P. Players are they restricted antibodies willing even to do anything in this market Jos.
Just high level discussion on what the end market the M&A market looks like thank you.
Yes.
As you would know better than most price discovery right now.
Difficult right because.
What revenue and what demand is going to be in 'twenty. Three is anybody's option and then you've got this whole issue of <unk>.
Boy I could have sold this thing 18 months ago and got these crazy multiples now I can't have it anymore. So you basically you just look at all the big banks I mean, no one's really doing much fundamentally.
We haven't changed our outlook at all sure we'll make some adjustments to that so our WAC rates and everything else on the discount rate to reflect current interest rates, but.
We're not buying things with debt at the end of the day I mean, I think that that's just modeling.
So we're still we've got some opportunities in the pipeline that.
Hopefully we can.
Close on in the medium term. So we are still on the front foot but.
The.
The price discovery is difficult and let me just put it that way.
Yes.
Thanks, so much.
Thanks.
Our next question comes from Joe Ritchie from Goldman Sachs.
Yeah.
Hi, Thanks, Good morning, guys.
Joe.
Hey, rich, maybe just a higher level question to start you guys talked about the capacity expansion, obviously the backlog isn't isn't good levels today I'm, just curious how you're thinking about that in the context of a potential slowdown in 2023, and ultimately how you potentially manage to maybe having excess capacity.
If the demand environment that slow.
Oh, Yeah, well look I mean, we're we're expanding capacity is where we believe that we've got secular demand. Okay. So what were doing up in Minneapolis.
As I referenced if you go back and look at the transcript about the growth rate that we've seen there I think the same thing about the heat exchangers.
So I've got high confidence about where we are fundamentally expanded capacity of what we're doing at four but having said that at the same time, we've begun again after taking a time out due to COVID-19 and this is.
Big demand ramp that we've seen over the last 18 months.
There, we can start accident footprint again, so arguably and I haven't I can't tell you on a square foot basis, but I'll bet that we're taking out as much.
Fixed cost footprint in 'twenty three as we're adding.
Got it Okay. That's super helpful.
And I guess my follow on question would be on the pumps and process business.
<unk> been <unk> been calling out.
This transition in Biopharma pumps now for the last couple of quarters.
And the fact that you you know you basically just more up against your toughest comp a year ago I'm. Just curious if you think we've hit a trough in margin in that business.
And maybe maybe you can just talk a little bit more about how much longer you will continue to see that transition across that piece of your portfolio.
Someone growth that we missed our margins were 29 seven versus 30.
God help me, but anyway look we think that the segment itself is a 30% full year margin business youll get some volatility quarter by quarter.
We've seen it right because of the fact.
I think that we were trying to say if you go back and look at what we were saying Q2 Q3, a year ago.
Let's not get all excited I think we posted 30 35, 36% margins during that time period that we kept saying that 30 was kind of the new normal for the segment itself.
I Gotta Italia I'm actually very pleased with the margin performance in Q3, because you can't see is the mix impact of how much biopharma is down which is down a lot right. Because we've just had capacity meaningfully to let this inventory liquidate but the margin performance we're getting out.
What were you know.
All sub 20% industrial businesses that make up the balance of the portfolio, we've actually lifted those businesses up. So this has happened to us three years ago.
The margin compression that we would have seen would have been meaningful but the fact of the matter is is that the operators on the industrial side have improved their margin profile.
Significantly which has allowed US you know we're going to $2 30 for the year. So overall.
We look at this at this point I will take if we take another quarter or paying on the biopharma side. So be it I look at that as a potential margin enhancement now for 2023 as opposed to a headwind.
Got it that's helpful. Thanks, Thanks rich.
Thanks.
Our next question comes from Scott Davis from Melius Research.
Hey, good morning, guys.
Hi, Scott.
Most of my questions have been answered, but on the FX side rich is it still mostly just translation issue or is it are we gotten so extreme now there's actually some global trade that's being adjusted.
I look the vast majority is translation I'll, let Brad step in because you can imagine with having 18 operating companies finding out transaction on FX I don't believe it's meaningful but he has done.
No. That's correct, it's mostly translation and as you know as we talked about in the script, we said.
The strength of the dollar was so fast in Q3 year that it really changed the dynamics of what we saw the impacts on topline.
And on our EPS.
Again, it's about 10 cents forecast or forecast.
Happens to be about 10 cents at the midpoint of our guide to so you could you could look at it that way there is lots of ways to look at.
Our guide change, but I would tell you ethics.
Where we're at now and the strength of the dollar it's.
It's significant.
It's been significant all year, but even more so now.
I don't think we're unique though Scott I don't think we're unique in that regard.
Likely not.
So.
Back up a little bit rich on the M&A side, you made some comments but.
It's okay.
How wide is the lens I guess is a question I wanted to ask that.
Are you.
I mean, theres assets available or we're <unk>.
At least by folks and there's not a there's.
Theres not a counterbid by some of the.
Traditional folks out there people are hunkering down a bit but.
As the lens wide enough, where you would take a take a stab at maybe something that is a little bit of field of your.
Existing portfolio.
No.
And I guess the question is how long is a piece of string I mean I think.
I'll answer your question two ways I think.
It's got to be a business that we believe that we've got a fundamental right to run right.
We are a manufacturer at the end of the day, so it's a manufacturing business and the processes on the factory floor are similar to what we do meaning that we've got a management team that knows how to extract value out of it it doesn't necessarily have to be in an end market that we participate today.
But we're not making any left or right turns into whatever the.
And the new.
Area for industrials to go in and chasing thematic. So I mean, we're much more bullish blockers and Tacklers. We know what we're good at and we know that we've built a back office engine now that allows us.
To extract meaningful synergy costs out of like minded businesses over time and that kind of that's our knitting.
But back to the issue about the scale.
We've got the ability now to take on something.
Materially larger than we would have undertaken back in 18 or 19.
That's helpful. Thank you good luck guys I appreciate it thanks.
Yeah.
Our next question comes from Joe O'dea from Wells Fargo.
Hi, good morning.
I wanted to revisit price cost and on the cost side of things and could you talk about the the raws piece versus the components piece and timing of when we start to see some of that come in and I would assume that roz just kind of flows through but I'm not sure what youre seeing from your suppliers and how much pressure you are putting on them to get costs.
And a lower raws environment.
The raws.
As we talk about raws, because we are a purchaser of raw material.
Youre seeing the benefit now right.
Was the issue of getting hung up in inventory back in Q2, and now you see the roll forward in Q3, plus the fact that we price for it.
We're positive price costs now on the raw side on the sub components, it's a bit over the map.
We don't see on the sub components, the pricing come down yet because.
Currently demand exceeds supply.
If that was to change.
And we would be a lot harder on some of our.
Component suppliers to reflect that in our pricing. So right now everybody is in a.
Standoff between well you want the product so youre going to pay for the product.
We will see and we're part of that chain. So right now we're getting the benefit of reduced raw materials cycling through inventory and the pricing, we're not seeing it on our purchasing of sub components, yet and but that will be dependent on volume I guess as we go forward.
Got it and then on clean energy and fueling and the cost out just the magnitude of the margin benefit to make sure. It's right think about the cadence.
Impact properly.
It looks like this is something like a 250 basis point margin left.
We could be seeing as early as Q4.
Maybe just talk about cadence and magnitude on that and then to the degree you're willing to kind of touch on some of the additional cost out you know how the magnitude of that compares to what you are.
You're currently sharing.
You won't see it in Q4 other than the fact that it is buffering the negative fixed cost absorption by taking the production down so what youll see you can't see it but what you see in the segment margin and you see it in Q3.
Without taking some of that cost action that you would have seen a margin compression in the segment, we expect that to remain for Q4 subject to what we do across the portfolio in terms of production performance.
And so you have the rollover benefit in.
In the bridge, there and Joe were going to do a investor day, because we haven't set longer term.
Margin targets and.
And I think let's wait until we get to guidance for 'twenty, three and we do that Investor day, and I think we will we will clarify what the upside is because it is a fundamental change to the business model, it's not just cost take out.
Thank you.
Our next question comes from Deane Dray from RBC capital markets.
Thank you and good morning, everyone.
Good morning.
Hey.
Couple of clarification questions I wanted to go back to Andy's question.
And you've got a decline in bookings its modest but.
Rich is there any impact as you improve lead times, while we're hearing that customers that don't have to order.
Vance as much so.
And also fewer units in their orders are you seeing that dynamic playing out.
Not the fewer units because of the lot sizes.
Yes.
On the components business lot sizes are what they are and then the buildup units, we get orders of one no.
But I look at Dana I mean at the end of the day.
It's natural why.
The uncertainty that's out there this hope that pricing is going to come down and everybody recognizes the supply chain better no one's going to order.
Transactional products six months in advance.
I think that when our backlog was going up we are warning everybody, but despite the fact everybody wants to write a book to bill is down by 5%.
It's healthy in a way.
What our customers are saying is we're going to go back to the more traditional order patterns are not you know we have a lot of discussions with our customers about capacity utilization and it goes back to a discussion as opposed to if you don't give me your orders are not getting the product and Thats, where we were for the last 18 months.
Got it and then just on your European outlook, you, you're not seeing it in the numbers yet but are there any contingencies.
Have in place.
And maybe even for fuel availability, just how have you thought that through.
On the next couple of quarters.
We are a small manufacturer from a footprint point of view and in Europe .
So we have exposure to fuel as an input cost, but it's I mean, we're not a chemical manufacturer it's just not.
The same but we are cautious about the demand for Europe and have been cautious about the demand in Europe , all through the quarter and so part of this whole discussion about taking down production performance and liquid and liquidating working capital. That's part of that is a European phenomenon.
That's helpful and just last one could you just clarify on the pump side and Biopharma how is your mix.
Related to non Covid.
Out of Covid.
Boost but if theres last COVID-19 production vaccine production et cetera, how was your non COVID-19 exposure.
Yeah, I'm not going to break it out I think you can send that into as a follow up and then you guys can work with you on the clarification I don't want to go through because I actually I don't have it at the top of my head.
Let me.
That up for you and I'll take you through it.
Thank you.
Youre welcome.
Our next question comes from Nigel Coe from Wolfe Research.
Thanks, Good morning, everyone.
Hello, Thanks for the details as always.
So rich you know as we kind of view your hopes are you you're talking about some cost reduction selectively across the U S.
And fueling.
You talked about the fed and I think.
Similar to your view about demand destruction.
Are you taking any of the measures you know maybe tapping the brakes on hiring.
Sounds like Capex, youre investing in select to be but what about <unk>.
Capex you you're thinking about capex down in 'twenty, three I mean, any other measures to prepare for.
On certain macro.
Sure I think the Capex is going to be down in 'twenty, three and it would've been under any demand scenario.
What we've got in the pipe.
What we've done and what we've got in the pipe.
We haven't done the full budget for next year, but I think that.
Off the top of my head it was going to be down regardless.
So I think it's going to be mostly maintenance capital and in flight that we've already announced frankly I'm not aware of anything hanging out there.
Yeah on the hiring selectively selectively by region and are selectively by business I think that we've been doing that progressively during the quarter for sure.
Okay.
And then on the inventory.
The slight build <unk> I'm not sure if that was mainly inflation impact, but how much inventory do you think you can get out.
Of the system by year end I understand you've talked about one in Q3.
But how much do you think realistically can get out by by year end and maybe just I don't know Brian . If you can just address the protection policy that you're expecting for <unk>.
Okay I'll take it.
As Brad mentioned in the letter.
We expect inventory, we don't have a lot of first off.
We don't have a ton of finished goods inventory, what we have is whip in raw materials, right and that's going to come down.
Yeah.
The issue is going to be depending on the cadence of the revenue how much is going to get hung up in receivables. So taken production performance down to push hard on inventory.
Because we think that we have.
I already discussed why so I don't know if Brad is going to monetize it.
It's going to be it's going to be meaningful, but I think you've got to be careful about between the size of the inventory drawdown versus the benefit into working capital because of the receiver.
And that's exactly what we said was the timing element to it.
What I would say, it's taken a long time to build the inventory, it's going to take some time to take it out but we're proactive on it.
I think the fourth quarter is going to look a lot like we've done historically is our highest quarter. If you look back in time, you'll find.
Six out of the last seven years high teens.
Some cases over 20%.
Free cash flow to revs in the fourth quarter. Our goal is a combination of taking out inventory and liquidating some of the receivables to Tim.
To mirror that we'll see how well we do like I said in the prepared comments it could take into the first part of 'twenty three.
Okay. That's helpful. Thanks, guys.
Okay.
And our last question comes from Julian Mitchell from Barclays.
Okay.
Hi, Good morning, Thanks for squeezing me in.
Maybe.
I just wanted to try and circle back on the sort of inventory and cash.
Cash flow dynamics, so I just wondered if when you look at your customers' inventory levels and maybe the excesses that did.
Do they sort of.
Map and match, where you think your excess inventories are as well and maybe just call out some of the areas when you're looking at the customer or distributor.
That you've that you sell into where you think that might be.
Most sort of pernicious excess inventory.
And also when you're thinking about totaling sort of underproduction and the impact on EPS for us.
As youll free cash flow.
Should we assume that next year, perhaps we have subpar cash flow conversion as well just as you try and sort of protect the earnings as well as bringing down inventory and receivables.
Well.
Okay, where to start on that and if we take production down its to liquidate inventory right. So if we go into next year.
Hopefully.
The inventory comes back because that means that demand is robust.
But we're not going to talk about 'twenty three demand because nobody knows.
Inventory that we can see isn't distribution and we are not aware of excess inventory in the supply chain. While we can't see is is OEM inventory.
And that's kind of what we saw from <unk> Biopharma turned down that there was a lot of excess inventory on the OEM side.
But we don't make product we don't make finished goods product to be called off. So our finished goods inventory that we have is for an order. The only thing that we have is raw materials. So I'm not sitting here being overly concerned that we've got excess raw materials that are not going to get consumed.
Over time, it will get consumed depending on the velocity of the demand.
Understood. Thanks, and then my follow up just around the restructuring and the cost out so I think you'll restructuring.
<unk> guide for the year is unchanged.
At 17th now I think it was 16 before and that's probably just the share count guide coming down but it seems like you are talking up the cost savings from restructuring next year. So I'm just wondering sort of how are you generating those savings if you're not booking the sort of P&L restructuring.
Oh, not stepping up the booked P&L restructuring expenses.
No Julien I'm not talking about the restructuring expenses, what I'm, saying is in that chart is the benefit we have given you the EPS benefit of the restructuring within 22 and the full year benefit of those announced restructurings in 'twenty three we've got other restructuring projects that we're working on that we will announce.
In time, the fact that you know the fact of the matter is we take when we take a restructuring charge, we feel obligated to tell you what the benefit is and Thats on a 12 month benefit going forward next year. It does not include any restructuring that has not been announced.
I understand so the savings next year, we could see some of that reflected in all the measures for that and restructuring expenses in 'twenty three so yes.
Cortes, Yes, sure full year benefit of it for sure but some of that is also in 'twenty two as Richard said, so it straddles both it's not double counted I guess is what we're seeing here.
That's clear thank you.
Welcome.
Thank you that does conclude our question and answer period in Dover's third quarter 2020 earnings Conference call. You May now disconnect. Your line at this time and have a wonderful day.
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