Q4 2022 Dover Corp Earnings Call
Okay.
Good morning, and welcome to Dover's fourth quarter and full year 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 Jeff <expletive> and senior director of Investor Relations.
After the Speakers' remarks, there will be a question and answer period, if you'd like to ask a question during that time. Please press star and then the number one on your telephone keypad, if you'd like to withdraw your question. Please press star two.
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 you I would now like to turn the call over to Mr. Jack Atkins. Please go ahead Sir.
Thank you Gretchen good morning, everyone and thank you for joining our call and audio version of this call will be available on our website through February 21st and a replay link of the webcast will be archived for 90 days.
Dover provides non-GAAP information and reconciliations between GAAP and adjusted measures are included in our Investor supplement and presentation materials, which are available on our website.
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'll turn the call over to rich.
Thanks, Jack Oh, let's get started with the performance highlights on slide three.
Dover delivered strong organic revenue growth of 9% and margin improvement of 150 basis points in the fourth quarter.
Volume mix price cost and prior period cost reduction actions all contributed to the positive performance.
As we've been forecasting throughout 2021 the relationship between supply chain constraints in bookings has continued to play out into Q4, the majority of the labor and component availability and logistics constraints have dissipated, resulting in production lead times returning to pre pandemic levels.
Importantly, our 4% annualized through cycle organic.
Bookings growth rate reflects the continued secular demand strength across our businesses. Our order backlog remains elevated compared to normal levels and provides us with a good top line visibility going into 'twenty.
Our continuous efforts to improve productivity inefficiency principally enabled by advances we achieved an e-commerce adoption back office consolidation and S. K U or SKU complexity reduction resulted in robust margin accretion in the quarter.
We expect benefits from our recent efforts to a further accrue in 2023.
We continue to deploy capital towards portfolio improvement organic growth and production production efficiency in 2022, our capital expenditures in 2022 were the highest.
And recent dove in history, and we continue to invest in manufacturing productivity projects and proactive capacity expansions.
To fuel our top line growth and margin improvement capabilities.
We also completed five attractive bolt on acquisitions in 'twenty, two that provide exposure to high growth technologies and end markets and finally, we took the opportunity to return capital to our shareholders, including the completion of our $500 million accelerated share repurchase which was completed in quarter four.
We entered 2023 with a constructive stance demand trends remain healthy across our portfolio and we have a significant volume of business and backlog entering into the new year.
Expected revenue growth price actions and productivity productivity measures from 2020 to lay the foundation for margin accretion in 2023.
If high confidence in Dover.
Markets for.
Flexible business model and proven execution playbook, continuing to deliver earnings growth our strategy for robust through cycle shareholder value creation remains unchanged.
Combined solid and consistent growth above GDP strong operational execution generating meaningful margin accretion over time and value added disciplined capital deployment. As a result of this we are forecasting full year garden guidance revenue guidance of 3% to 5%.
Organic revenue growth and adjusted EPS of $8 85 to $9.05.
I'll Skip slide four and let's move on to slide five.
Engineered products revenue was up 16% in the quarter, continuing the trend of double digit topline growth through the year.
Revenue growth was broad based across the portfolio as particular strength in North America.
Margins continued the sequential build throughout the year, finishing Q4 at 20% a 620 basis points year over year, primarily driven by improving supply chains and price cost dynamics product mix as well as events investments and productivity initiatives.
Clean energy and fueling finished the quarter and the year roughly flat on an organic basis revenue performance for the quarter was up and clean energy components vehicle wash fuel transport and below ground retail fueling offsetting the comparable decline of dispenser and Eve <unk> card reader demand.
In the period.
<unk> for the quarter were up 170 basis points on positive price cost and the mix impact from both organic and inorganic inorganic investments that we've made in clean energy components of vehicle wash.
This was augmented by further cost reduction actions initiatives in the third quarter and the full the full year carryover. These actions will continue to accrue in 2023.
In imaging and identification volumes for our marking and coding printers spare parts and consumables were strong in all geographies with the exception of near term softness in China due to the Covid impact.
Our software businesses continue to perform well with penetration of key customer brand accounts with strong growth in SaaS portion of our serialization software.
FX remained negative headwind to absolute revenue and profits in this segment given its large base of non QM.
Q4 margins in imaging, an idea were very strong at 25% improving 250 basis points on stronger volumes pricing actions and products product mix richness.
This business has delivered exemplary margin improvement in the last few years as it utilizes our productivity tools for ecommerce back office consolidation and offshore engineering.
Pumps and process solutions was up 4% organically for the year, but posted a 4% decline in the fourth quarter driven principally by post COVID-19 transition in the Biopharma space. The non Covid Biopharma business has continued to grow and our overall biopharma business is well above its prepaid the pre pandemic level.
New orders for Biopharma connectors inflected positively in the fourth quarter after several quarters of sequential declines.
All other business segments posted solid organic growth in the fourth quarter with particular strength in.
Polymer processing equipment and precision components on the back of improved conditions in energy markets.
Operating margin for the quarter was 29% is comparable revenue mix of product delivered.
Tom spending climate and sustainability technologies continued its double digit growth in the fourth quarter posted 27% organic growth across all businesses and geographies.
Demand demand trends remain particularly robust in heat exchangers and C. O two refrigeration systems, driven by the global investments and sustainability.
Our capacity expansion programs and policies.
Schedule, we will continue to allow us to continue to meet growing customer demand.
Margins were up 450 basis points in the quarter and over 300 basis points for the full year on improved productivity.
Food retail and strong volume growth and good mix of product delivered.
I'll pass it onto brand here, thanks, rich good morning, everyone.
I'm on slide six the top bridge shows our quarterly organic revenue growth of 9% driven by increases in four of our five segments as expected FX was a substantial headwind at 5% or $94 million and impacted both revenue growth and profitability.
Ethics headwinds resulted in Q resulted in Q4 and full year 2022 negative EPS impacts of 10 and 35, respectively.
Recent euro gains against dollar reduced our forecasted FX headwinds in 2023, which we currently estimate at five to 10 cents for the full year EPS.
M&A contributed $58 million to the topline in the quarter a product of 80 million from acquisitions, partially offset by $22 million from divestitures late in 2021.
We saw strong organic growth across most of our geographies.
In the quarter the U S. Our largest market was up 7% organically Europe was up 19% organically driven by particular strength in polymer processing beverage can making natural refrigerated systems and heat exchangers.
All of Asia was down 1%.
Which represents approximately half of our business in Asia declined by about 10% in Q4, driven by short term impacts from the Covid resurgence.
On the bottom chart bookings were down year over year.
Due to foreign exchange translation and normalizing lead times across several businesses.
Now on our cash flow statement on page slide seven.
Free cash flow for the year came in at 585 million down year over year on increased capital expenditures.
One time tax payments and investments in working capital supporting growth.
At our current earnings margin, we would expect to generate free cash flow of approximately 13% of revenue in an average year 'twenty.
'twenty 2022 free cash flow lagged behind that level due primarily to elevated working capital investments driving two thirds of the gap.
As previously discussed our view.
We view incremental investment in inventory over the past two years as productive despite its carrying cost, enabling us to deliver 17% cumulative organic topline growth and over 30% growth in absolute EBITA between 2019.
In 2022.
We're now focused on extracting back cash invested in inventory.
Our supply chain has improved in the fourth quarter, we began reducing inventory, particularly finished goods.
The majority of the excess we carry into 2023 is in raw materials, and we expect to consume a significant portion of that excess in the first half of the year.
In addition, and in addition to inventory reductions, we expect to collect elevated receivables from the fourth quarter and normalize our payable balances driving significant improvement in working capital in 2023.
We also forecast lower Capex, followed following a stepped up capex year in 2022 as a result, our forecast for 2023 free cash flow is between 15 and 17% of revenue.
Turn it back to rich, Okay, I'm on slide eight.
I'll be brief on this slide since we've been discussing the linkages between bookings backlog and revenue and expected trajectory of these metrics for nearly two years.
First I'll remind everyone that in 2021 bookings of $9 $4 billion, driven by post COVID-19 demand surge as well as constrained supply change that required customers to order in advance, we're roughly 20% higher than our revenue that year, resulting in an unprecedented backlog that requires time to chip in on the wind while bookings normally.
Importantly concerns about double ordering and cancellations did not materialize and we have been depleting the backlog in an orderly fashion as product lead times improved if we smooth out the post pandemic surge in bookings our bookings CAGR has been 4% from 2019 to 2022.
Let's go to slide nine here, we show the growth and margin outlook by segment for 2023 that underpinned our guidance, we expect engineered products to remain solid pent up demand.
And automation initiatives in waste hauling support a robust outlook. Despite high demand our refuse collection vehicles shipments in 2022 is still has not recovered to pre pandemic levels due to chassis availability. After after an excellent performance and vehicle services group in Q4, we.
A slower start in 2023.
In engineered products is forecast to improve margins in 2023 on solid volumes benefits from our recent productivity capital investments, taking hold and positive price cost tailwind.
Clean energy and fueling is expected to grow single digits organically, which we expect to be second half weighted due to subdued demand for dispensers.
Dispenser bookings beginning to normalize we expect Q1 to be the trough for the business with gradual recovery through the remainder of the year. All other businesses. In this segment are positioned well for growth in 2023, but particular strength in our clean energy components for the year, we expect margin improvement in coal and LNG and fueling a volume recovery.
Improved mix and recently enacted restructuring actions and above ground fueling.
Imaging and idea is expected to continue its trajectory steady GDP growth with attractive margins, we see robust demand for new printers and components and consumables.
And professional services the outlook for the bolt serialization and brand protection software is also strong.
Margin in this business are robust and we expect them to remain as such through 2023.
We project flat organic growth in pumps and process solutions, our industrial pumps in plastics and polymers precision components and thermal connector businesses are all positioned for solid growth Biopharma components business is expect to hit its bottom involved in volume and margin in the first quarter as customers worked through and repurpose excess.
Inventory, we are beginning to see encouraging signs of bookings for our Biopharma connectors and our full four year forecast may prove to be conservative.
The long term the long term tailwind for single use components or biological drug manufacturing remain compelling and importantly, our products are specified for regulated manufacturing of therapies with attractive growth outlook and we continue to win new specifications and an active pipeline of new biologic and cell and gene therapies.
Margin performance expected expected to be roughly flat for the year with a sequentially lower level in the first and second quarters, an unfavorable product mix from slower Biopharma and geographic mix from higher sales in China for plastics and polymer growth outlook for our climate and sustainability technologies remained solid.
As our businesses continue to ship against strong backlog levels. We are forecasting continued double digit growth.
In both natural refrigerant systems, and heat exchangers for heat pumps or beverage can making businesses booked well into 2023.
<unk> continued margin improvement in 2023 on volume conversion productivity gains and mix.
Let's move on to slide 10.
Here, we show our recent performance against our capital allocation priorities, our priority is to reinvest in our business, which represents the highest return on investment 2022 represented a recent record for Capex was numerous capacity expansions and productivity investments completed.
We will continue our efforts to add attractive bolt on acquisitions to improve our portfolio by entering new markets secular growth, we invested $325 million into hot into five highly attractive acquisitions in 2022, we're carrying significant firepower and a compelling M&A pipeline into <unk>.
2023, finally, as we did in 2022, we will return excess liquidity to our shareholders through increased dividends and opportunistic.
Right.
Let's move on to slide 11 for the wrap up before we get into our full year guidance I'll make a few comments on our view of the macro environment and how we believe the year may develop first and foremost we hope that the fed is cautious going forward from here.
Support the efforts to tackle inflation, which had had a large hand and causing but we are in the camp that believes that the fed has gone far enough and the lagged effect of the further actions can be problematic problematic to economic growth.
Market participants are likely to be cautious with the timing of the demand generating decisions as there is a recognition that manufacturing lead times and logistics constraints have been largely repaired and as such we expect first quarter to demand to reflect this cautious stance, we expect seasonality to the year to be weighted towards quarters, two and <unk>.
Three in revenue and earnings and waited to H, one for cash flow as our balance sheet reflects liquidation of inventory and receivables from 2022.
Despite the uncertain macro our goals remain ambitious we will push hard to win our share of demand. We've done a lot of work to improve the performance of our products and we believe we have the right to win.
We are proactively explore.
Expanded capacity to meet projected demand in areas of the portfolio with significant secular growth opportunities. So now let me put our guide and EPS poor performance of the longer term perspective, our objective is to deliver double digit through cycle EPS growth for our investors through a balanced mix of healthy revenue growth margin accretion.
<unk> value, creating capital deployment.
We have been delivering on that equipment.
That commitment and we will drive will continue to drive.
To continue to do so.
Thank our customers for trusting Dover businesses to deliver under important needs and I'm grateful that Dover teams across the world for continuing to serve our customers and execute well despite various challenges along the road.
That's completes the comments Jack let's go to questions.
If you'd like to ask a question simply press Star then the number one on your telephone keypad. If he would like to withdraw. Your question. Please press star can we ask that participants limit themselves to one question and one follow up question. We will take our first question from Andrew <unk> from Bank of America.
Good morning. This is David Ridley Lane on for Andrew then so there are different reasons reasons for each segment, but the guidance as soon as better second half growth.
Three of the five segments.
What what's kind of the underlying demand assumption are you assuming things are fairly stable or do you have that kind of a deterioration in underlying demand given you're seeing better second half growth and central.
Several segments.
I think that the feedback that we're getting from our customers is to start off the year cautiously I think that there is in a lot of portions of the marketplace, there's inventory that needs to be depleted.
And I think that there is a concern about the macro.
There also is this view that inflation is coming down and that being prudent about when to start projects is probably going to put them into money.
Furthermore, I think they'd have a difficult comp in Q1, just because of FX alone. So.
I don't think there's anything.
Other than you know as we mentioned biopharma, meaning getting to the bottom we would expect orders to inflect positively from there I think it's just an overly cautious stance going into the new year, everybody knows that lead times have been prepared have been repeat or not.
Not as if they have to put the orders in and take and take the deliveries in Q1. So it will actually go back to what had been historically.
The seasonality of the Dover portfolio, where there's a little bit of a slow start.
Second quarter and third quarter are quite high and then we run for cash in Q4.
Got it and then a quick one on China I heard you that you'd seen some demand disruptions given the COVID-19 resurgence any concern about labor rates labor related disruptions at your operations, where our suppliers showing up.
Later this year.
No I mean, our from a from a supply standpoint, we are not overly levered towards China with the exception of electronic components, which don't make.
A disproportionate high amount of our purchase of so no I don't I think that China. We the stance is it's going to get better from here not worse.
Thank you very much.
Welcome.
Our next question comes from Jeff Sprague from vertical research.
Hey, Thank you good morning, everyone.
Hey, rich.
Just on the the.
The order normalization I agree we've been talking about this for a long time do you kind of expect things to revert back to that.
And our historical balance for your backlog as you know call it 20% or so forward sales by the end of the year or do you think this takes a bit longer than normalized.
Well a lot of that depends on the macro Jeff at the end of the day, but yeah. I mean, yes, we would expect to go back to I would call your attention to the slide that we had at the end of Q3 that showed normal backlogs by segment.
And we would expect to go back there if 19 as normal let's say I think that's what the comparison them comparative number there is we would expect it to go back there.
And then.
But it may flex overtime, but again I'll leave it at that it will go back to and I would call your attention that slide and that is we're going to end up.
Okay, great. Thanks for that and then.
Yeah.
The comments to the just the prior question kind of touched on this a little bit but the nature of my follow up here as well.
What is the price discussion like on orders now you know now that as you say kind of well.
Why chains are normalizing and there's an expectation that inflation does begin to fade.
Do you see downward pressure on price and maybe put that in the context of you know.
What your own cost equation looks like in 2023.
Yeah, we've been pretty disciplined in terms of not repricing our backlog.
Oh for sure. So I don't expect any issues there that are not manageable.
I think that when we can expect at the beginning of this year is everybody.
Having a view or not and this includes us when we deal with our own suppliers that inflation is coming down and you notified.
If I.
Spend some time in Q1 renegotiating, maybe I can force the issue to a certain extent.
So in our estimates we don't have any unannounced unannounced pricing that's not out in the marketplace, meaning with is not baked into our numbers another price increase in the June time frame.
But it's gonna be it's it's it's going to be interesting to see how it develops over time I think it's going to be reflected more in a delay in terms of the order rates until we get into a position of <unk>.
Back and forth of deal you know when do you need the product and when do you have to start negotiating the price.
And that algorithm leaves your price cost positive for the year as it stands yeah, yeah, our estimates our price cost positive for the year based on roll forward, what basically what you see in Q4.
Alright, thank you.
Youre welcome.
Our next question comes from Steve Tusa from J P. Morgan.
Hey, guys good morning.
Okay.
So it just to eat you have these backlogs right and expect them to you expect to work them down over the course of the year why why wouldn't that mean that you know assuming that those lead times I mean, they are extended but.
Thank god to extended given the nature of your business why wouldn't that you know.
Liquidation of backlog help kind of the normal seasonality you know assuming that you.
The trend line is what it is but you're delivering out of backlog, which should help sales in the near term why why are customers.
You know not not taking this stuff earlier.
Well it is a lot of them are based on their own Capex plan. So as we as we talked about at the end of Q4 about the decline in dispensers It was kind of.
Interesting to us because we were shipping heavily in the below ground and hardly shipping anything in above ground and that was a reflection of the delay.
And getting these projects done because of supply chain constraints and labor and everything else I think.
They were going to see a little let that as an example, we're going to see a little bit of that more in Q1.
Right. So despite having the backlog the customers are not saying you know what deliberate on January 1st and I'll go and put it in the warehouse and I'll pull it out but I want they just don't feel the need that's where it was kind of going on in the marketplace to a certain extent for a period of time as that accordion effect is beginning to unwind yeah the backlog.
<unk> there, but they are saying you know what.
Here's the timing of my project and I May wanted in March I may wanted it in April so the depletion will be orderly over the balance of the year.
Got it and then how much.
Price.
Are you are you assuming this year and in our in the organic.
I don't think that we disclosed that but it's a good portion of the organic growth is is price.
Okay and then one last one for you just on orders I think to get to that level of backlog at the end of the year. It looks like it's roughly I don't know like a $2 billion backlog, assuming a mid single digit growth rate.
Which which would imply roughly $6 billion of orders is that does that feel about right.
May do it in my head Yeah, that's close yeah.
It kind of gets ran and it's going to be very much contingent on what happens in the long cycle portion of the business right. The the mods and the bell vaccine to a certain extent swept which is becoming a long cycle business because.
We're beginning to rather than sell the properties, we're selling capacity. So if those three hang in there then yeah. That's that's all day.
Yeah, Okay that that and those would be the toughest comps in the first half.
Correct, Yeah, Okay, great. Thanks.
<unk>.
Our next question comes from Joe Ritchie from Goldman Sachs.
Thanks, Good morning, guys.
Hey, Joe.
So Richard I, just want to make sure I understand your your seasonality comment as it relates to the first quarter, because if I go back to like prior seasonality you could see yeah first quarter being kind of a high teens percentage of the full year two kind of mid twenties.
I mean, if I use the midpoint it kind of puts me around the $2 range, if I'm doing the math right.
For the first quarter I, just want to make sure that.
Some level setting correctly.
Joe I don't have excel opened here in front of me I'd like to talk about the calculus.
[laughter] it's luck.
And at the end of the day. This is just a general statement about the feedback that we're getting from the marketplace right everybody is.
<unk> about recession, and so there is a bias towards being very careful with inventory us included.
So we just think that the the take off as a back to the question that Steve asked before.
Is that the backlogs there, but the take rate on that backlog should start out slowly right until everybody gets in place. We can a lot of what we deliver it goes right to the project site and a lot of cases at least the businesses that are.
Tethered to distribution. So I'm, you know I'm not calling for a collapse in Q1 by any stretch of the margin, but we don't want to do with the only reason that we're calling it out is we're coming out of periods, where we had very strong Q1's in the seasonality.
Versus the past got a little bit out of whack. So we're just telling you to just be careful with Q1, the full year as the full year and we're confident in that but I think we just we have to be we have to recognize that is an amount of caution in the marketplace and everybody is going to be very careful about how much inventory they love.
Hey in until they can see what's going on with.
Kind of the macro per se.
Got it no that makes sense I guess, maybe my quick follow on I think last quarter, you guys had called out I think like a roughly 23 cent benefit and D. C are from from the cost action and you're continuing to highlight you know kind of margin improvement. This year can you maybe.
So.
Firstly, you know are we still on track for that 23 cents and then secondly.
You know across the rest of the portfolio, where are you seeing opportunities for margin expansion in 2023.
It is all of the 23 was notch in clean energy I think 19 of the 23, if I if.
If I remember correctly more or less isn't there yet and some of that was in the fourth quarter and two yeah and some of that was in the fourth quarter also because we actually took the cost actions and in Q3, but everything is on track. What you do is you get.
You get a bad comp in that business, because it was still delivering pretty heavily in Q1.
But we expect that to be offset by.
Clean energy components and below ground and car wash, which are margin accretive so you get basically.
Over the year, a positive inflection of mix.
On the portfolio, but I think you just have to be a little bit careful in Q1, just because of the above ground is a bad comp.
Got it makes sense thanks, guys.
Thanks.
Our next question comes from Andy Kaplowitz from Citigroup.
Yes.
Rich could you give us a little more color regarding expectations for D. P. P. S. In 'twenty three what's your conviction level in terms of Biopharma connectors destock ending in Q1 I know you mentioned book has inflicted you know sequentially and then just in terms of margin I know you're forecasting flattish for the year in this segment.
Then you know given where Q4 'twenty two left off it's not that easy to get there. So maybe you could help elaborate on your cost controls and productivity actions in that segment that gets you back to those 22 levels.
Yeah, well, we did take cost out as volume came out of the out of the sector for sure and we did that progressively through the year and I think we took a further action in the end of Q3 Q4 more or less.
Look orders are beginning to inflect, we're paying a lot of attention to the commentary of our customers out there who are basically saying you know it's an H one event and then they expect to have all the inventory cleared I will tell you.
That we have not been overly ambitious and our estimates for the full year. So I think.
If we're going to you know.
I think that we may have a little bit more difficult to H, one, but I think that we've got a better than even chance to have a better than expected.
<unk> in the second half of the year, but you know what.
We'd like to see is in the order rates come up and start expanding capacity to deal with it which I think we can turn around and do it. So yeah. The flat margins year over year, we're going to have to be really careful with our cost controls and we're gonna have to deliver.
Polymers and plastics and precision components are going to have to deliver on the volume that we expect to get out of those two businesses.
But it's not like we're being overly ambitious in volume in Biopharma for the year.
Great and then rich I know you want it you don't want to tell US all about your Investor Day, you know in March, but maybe you know in terms of you've talked about portfolio imagine a little more frequently lately. So maybe update us on that and then you know obviously you talked to the beginning of your prepared comments around S. K. You imagine then you know you've been really focused.
On costs. So in terms of longer term margin targets anything to sort of talk about their preview there I see margins can rise pretty significantly from where they ended in 'twenty two.
Well I mean, that's going to be part of and Andy at the end of the day, so let's not get the cart before the horse, but we're going to basically do what we did back in 19 and tried to give you a.
A three year forward rolled by segment and what we think the contributing factors to it I'm in a lot of it is going to be ongoing productivity, but I think what's underestimated is that the organic revenue potential.
Is underestimated and I think we've done a lot of work in terms of mix here. So the mix of the products that we have today versus what we started with in 'twenty is.
A lot different than it was back then so it's not some ambitious we're gonna grow completely out of the order I think will grow higher than basically the market expects us because we generally get bottom quartile expected growth rates in revenue, but I think mix is going to be the most important aspect of it do you.
You expect to give a specific target around organic growth or is it like GDP plus.
I don't know yet.
Fair enough thanks rich.
[laughter].
Our next question comes from Scott Davis from Melius.
<unk>.
Hey, good morning, guys.
Scott.
You know I, probably asked this a couple of quarters ago, but the M&A markets Richard did come down to more realistic levels for you guys expect to be a little bit more active in 'twenty three.
Well I guess, taking on any leverage to do a deal has not been well received by anybody. So I guess, we would have to be careful with a larger deal presently for whatever reason the capital markets or not.
Looking kindly I leverage for I guess for the reasons that we can understand about on surety of the macro going forward, but yeah, I think that what we've seen.
So far is that a realistic multiples are now becoming a reflective of what's gone on in the in the in the capital market. So you always have with most of our deals are private as you know private companies Theres always a lag between that.
Public capital markets, and our private valuation I think that that has narrowed.
Towards the to the public capital markets.
Okay, and because I don't I don't like to traffic or minutiae, but is there such a thing as I can making cycle I mean, what it seems like we've had pretty high demand here for several years in a row, what what's in the other side of it is there a big investment cycle now and then it just kind of air pockets after that or is there some new.
Dynamic.
Involved in that in that world.
I'm not allowed to say that it's bad to AP right because the Cta is love to pick up on that on that step, but yeah look I mean, it is a cyclical business and there are investment cycles and part and parcel is to now not overcapacities yourself as the cycle goes up and the recapture on the spare parts which are.
Margin accretive on the way down so that's the way that we look at the business now.
Having said that.
It will be interesting to see what happens with P. E T. In in in drinks going forward. There's you know I know that theres been a little bit of a pushback on an ESG lately.
But the fact of the matter is is that P. E. T from an environmental point of view is not a preferred option so to the extent that.
The cost plus the ESG aspect of P T.
Over time make aluminum more attractive than we could that that is the by far the largest portion of the market. So even if a recapture rate of.
15% of that P. P T market would drive another cycle. So that's kind of where we are right now.
Mhm Alright helpful. Good luck guys 23. Thanks.
Yeah.
Our next question comes from Josh <unk> from Morgan Stanley .
Hey, good morning, guys.
Good morning.
Rich so you've been you know sort of telegraphing.
Telegraphing whats happened with orders and backlog and kind of watching the fed movements for a while now and.
And more concerned about them overdoing. It does your view of you know kind of downturn management what's different.
As of some of the scarcity that we've had the last two years in terms of hiring folks you know what.
For new suppliers, you know maybe honoring existing agreements does any of that look different.
With the recovery on the other side, we kind of have more of the same scarcity that we've had in the past.
Yeah, I wouldn't think.
I wouldn't expect to run into.
The logistics constraints.
That we've seen I think that was a one off I mean, you had just such a.
The collapse of the macro and then a restart and then you had a lot of you know.
Energy markets went haywire, which drove the logistics market say, where I don't expect that to happen I mean, I think that capacity was brought on and if you look at logistics costs and the forward curves there.
I don't expect that to.
To repeat under any reasonable macro scenario from here.
I think there is a lot of liquidity that's being.
Taken from the general market I think that lending.
Is very low right now.
It's very difficult to get loans and securities and secure liquidity to run businesses out there I'm not making a dover comment I'm talking.
In total in total.
So I'm concerned about that.
And if that's the case and there is the only way that if you're a private company. The other way you can generate liquidity liquidity in order to continue to fund yourself is to draw down inventory balances to extremely low levels and that's negative to orders and revenue going forward. So that's our overall concerned of I don't see the point.
<unk>.
Bringing out another 50 basis points only to turn around and give the 50 basis points back into Q4, why bother why can't we just sit where we're standing right here because you know liquidity in the market is incredibly tight right now.
So that's the fear at the end of the day is that you have a delayed capex cycle, which you know we ascribed to the fact that there is a capex need out there because of productivity to offset higher labor costs and then you've got all the stimulus money out there, but the fact of the matter is theres no liquidity.
To accompany that I think that you have a delay effect that could be problematic.
Sense from you guys as lead times have improved that this was sort of a quarter, where customers you know kind of squeeze the accordion on hey, we don't need things you know 16 weeks earlier than normal anymore. So let's get back to maybe more normal ordering pace like is there an artificial low that you go through.
On orders as lead times normalized or is that something that's kind of barely perceptible over the medium term is exactly what we think and we think it's going to continue through Q1, and then from there we expect based on <unk>.
Our view of the demand cycle that it will inflect positively positively from there, but I think youre going to get another quarter of exactly how you described it right I know I can get the product I have enough inventory to carry me through the quarter I'm going to take the chance of depleting. It because I know you can deliver into Q2.
Very helpful. Thanks Best of luck.
Thanks.
Our next question comes from Guy hardware from Credit Suisse.
Hi, good morning.
Hi, good morning.
Richard I think on the last cool you talked about a fundamental change to the business model in D. C. E. So you're ready to talk a bit more about that today.
Yeah.
Well I, you know I would I'd leave that to the Investor day.
Right I mean, I think that Mike My comment was is that.
And we went through this period of E. N V. And then we went through this period of the over hype EV, taking over the world and we were basically saying that we believe that we can position this business to harvest profits.
For 20 years, and I think that where we've made the moves in Q3 of this year to begin to position ourselves appropriately there right. So there was no sense of doing in advance of a rising revenue curve, but you know now that it flattens out we've got to run that business differently.
On one hand and on the other hand, we've been a pretty active acquirer.
In that particular segment as we transition to clean energy exposure, particularly in the hydrogen space. So.
We're doing it.
But I would if youre looking for you know what does that mean going forward from here in a holistic way why don't we wait until until March and we will.
Surely talk about it.
Just a follow up could you clarify that backlog Matt.
Where do you think you could be at the end of the year.
Yeah, you know what when do we take this offline because everybody's got a different calculation of <unk>.
I think that there was 20% of the annual revenue should be in backlog and in a normal time so.
What our forecast is for revenue for this year. So it's a relatively easy calculation.
Thank you.
Yeah.
Our next question comes from Nigel Coe from Wolfe Research.
Thanks, Good morning, everyone.
So rich a couple of ground here, but I'm just going back to the caution.
You seem to talk about inventory and your inventory management more so than projects I'm. Just wondering you know if you have to generalize would.
Would you say the caution is more on capex or was it more the channel partners.
Managing inventory levels, very very tightly and what do you say U S versus Europe . You know would you say both are in the same camp or would you say the U S is right now where you're seeing the most Scotia I.
I think it's a U S centric comment I mean, if you look at our growth rate in Europe , I don't think anybody would have modeled that considering kind of the overall.
Caution about Europe in total, but frankly, a lot of what we do out of our production base in Europe gets you know we recognize the revenue in Europe , but it may end up around the world at the end of the day, but I think my.
It's more.
We.
Our exposure in terms of our exposure is larger than North America. So it's largely a north American comment I don't I think that Europe any kind of.
Let's call it destocking would've happened during this past year, because they were in the front end of the curve.
Right Okay.
And then just you mentioned free.
Free cash flow more loaded to the first half of the year, which is obviously very unusual you mentioned that the bulk of your excess inventories will materials. So that doesn't seem to have an impact on your fixed cost absorption, but I'm wondering as you go through the inventory management are you expecting that would be some margin penalty as you've worked on inventories.
Oh, no actually I think that in our models, it's a margin credit as we liquidate it because if you look at forwards based on when we bought that inventory sequentially through 2022, it's actually and you can see it in our margins and some of the sectors and that's part and parcel to this price cost.
Look at the end of the day.
Yeah, if I go back and look over the last couple of years, we made a significant investment in inventory and that allowed us allowed us to deliver revenue growth that was above expectation.
No.
Now.
Lead times and availability and capacity has repaired itself. So we get almost a triple effect of we liquidate kind of the excess raw materials that we've been carrying to meet demand because we slowed down production.
In Q4, our payables balance dropped significantly so from a net working capital point of view we got.
The negative of shipping heavily in Q4, so there's a big receivable balance that gets liquidated build probably in the latter half of Q1, but more in Q2, our payables expand and then we collect on that receivables balance. So all three come in in the first half.
Makes sense, thanks rich thanks.
<unk>.
Last question comes from Julian Mitchell from Barclays.
Yeah.
Hi, good morning, and thanks for squeezing me in May.
Maybe rich you'd mentioned a mix once or twice as a factor and we can obviously see that impacting the D. P. P. S is well documented and I just wanted to circle back to the.
D I I segments I'm, you know there was a mixed tailwind I think in fourth quarter possible headwind and in the year ahead Guy did and that's weighing on the margins there and maybe expand a little bit on that.
D E P had an exceptional margin expansion, albeit off an easy base.
Is there anything much moving around on mix in D E P.
In D E P no.
I think rightly.
I would look at EEP sequentially as opposed to comp right. We all know what happened in Q4 of 2022. So that's why we have been saying all year that.
Not to worry because as price cost rolls forward.
Youre going to get what you get but I would look at <unk> on a sequential basis as a precursor of what you can expect into 'twenty three.
And the other question you had was on on our marking and coding right.
Yes. He is just a function of.
The amount of consumables shipped in any given period meeting.
The more that you ship in printers that is.
<unk>.
That is negative to margins to more than <unk> shipping consumables. It's positive it's going to bounce around I think that our comment that we made on that particular business that is that the margins are quite robust and it's all about what kind of revenue growth. We can get from here, we're not calling it down for 23.
That's helpful. Thank you and then just a follow up on kind of light does the operating margin. So I think the operating margin overall was flattish in 2022, it's guided maybe to grow a little bit in 2023.
I just wanted to live with that backdrop is there any appetite maybe to accelerate restructuring spend I saw in your guide you've got kind of 10 sentence I think for 2023 after 20 cents last year, but I wanted to just sort of thinking ahead is it may be the appetite to drive make sure that 24, let's say has.
Stronger margin expansion in that might require more restructuring this year.
Well Julien I mean, I think to the extent that we have flat margins. Despite the fact that our biopharma business, which is clearly our most profitable portion of the portfolio being down.
One could argue that once we get through the strong we'd get through this destocking period, which we expect to be an H 123 event is that and flex back to the positive that the incremental margins that we're going to see there and all things being equal we hold and continuing to improve the balance of the portfolio.
That by itself is margin accretion, but I think I would call your attention to what we've done.
And climate and sustainability, we think that that's got room to run we think that we've gotten with Dps. We've just talked about I think we've got some growth there and we've got the return of Biopharma in the second half of the year, which by the I'll repeat myself I don't think we've been overly ambitious but that we think we are going to keep that in.
Our back pocket and see how the market develops.
And the roll forward on the engineered products. If we look at what our exit rate is and we roll that forward I think that's quite healthy from a margin point of view.
So back to the restructuring look we're always.
Scouring, our fixed costs around here or management is incentivized to deliver.
Fixed cost reduction and incremental margins. So I would expect we'll continue to do so, but I don't see any need to accelerate it.
Protect margin performance going forward.
Great. Thank you.
Youre welcome.
Okay.
Thank you that concludes our question and answer period end Dover's fourth quarter and full year 2022 earnings Conference call. You May now disconnect. Your line at this time and have a wonderful day.
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