Q2 2023 Dover Corp Earnings Call
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Good morning, and welcome to Dover second quarter, 'twenty twenty-three earnings conference call.
Today are Richard J, Tobin, President and Chief Executive Officer, Brad <unk>, Senior Vice President and Chief Financial Officer, and Jack Dickens Senior director of Investor Relations. After the Speakers' remarks, there will be a question and answer period. If you would like to ask a question. During this time Please press star.
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Thank you I would now like to turn the call over to Mr. Jack Atkins. Please go ahead Sir.
Thank you Shelby good morning, everyone and thank you for joining our call.
Audio version of this call will be available on our website through August 15th and a replay link of the webcast will be archived for 90 days.
Our comments today will include forward looking statements based on current expectations.
All 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.
Thanks, Jack let's start on slide three our results were in line with our internal forecast in the second quarter.
Our secular growth exposed businesses that we highlighted at our recent investor day outperformed in the quarter with heat exchangers.
Natural refrigerant refrigerant systems, and polymer processing, all posting growth in excess of 20%.
During the quarter, we incurred operational headwinds from our vehicle service group main production facility as a result of an ERP implementation, which cost us approximately $50 million in revenue and approximately 10 cents of EPS.
This one's on me the business has been doing an excellent job on efficiency actions related to fixed related to fixed costs S Cube SKU management.
<unk> vertical integration over the past 18 months, which has been reflected in the margin performance.
Conducting a much needed E ERP upgrade which is fundamental to our e-commerce ambitions, while finishing a large capex project was in retrospect overly ambitious.
And I guess I should've known better we exited June and the good news as we exited June with far improved production performance at the site.
And we will try our best to claw back the lost volumes in the second half.
We have a constructive outlook for the second half of the year.
And are narrowing our annual EPS guidance to $8.85 to $9 since the start of the year, we expected 2023 performance to be weighted to the second half due to post pandemic destocking across the industrial economy.
And the gradual recovery in several of our end markets, but the seasonality of second half earnings consistent what we saw in the pre pandemic years.
Underlying demand remains good across the portfolio and a significant volume of business is already in the backlog, we proactively intervenes on our cost structure, starting in the latter half of 2022 and.
And we have continued the structural cost reductions in 2023 driving material earnings benefits.
As a result, we are less relying on topline topline volume or price cost to achieve our forecast in the second half with a solid demand outlook flexible business model and execution playbook, we are confident in delivering our second half Scott.
We also see a solid foundation building for 2020 for a large portion of our portfolio has experienced secular or cyclical momentum gross exposures that should persist in a variety of macro conditions and we are proactively adding capacity to ensure we continue to win in these markets.
We also expect solid carryover benefits benefits into 2024 from previously announced cost reduction actions. These organic initiatives together with a strong acquisition pipeline and meaningful cash flow Jennifer generation will keep us on track to achieve our long term growth and value creation goals.
We set forth in our Investor day in March let's go to slide four.
Consolidated organic revenue was down 3% in the quarter despite growth in three of the five segments due to expected comparable volume declines in several end markets and the aforementioned shipping disruptions and vehicle market, which cost us 2% to the top line.
Organic bookings were down 8%, resulting in a book to Bill of <unk> 92, reflecting better lead times across the portfolio and continued strong shipments against backlogs in our longer cycle and secular growth exposed businesses. As a result, our backlog continues to normalize but still remains elevated elevated relative.
The pandemic levels.
Segment margin was 20.2 with margin performance preserve despite negative mix and lower volumes due to proactive cost containment actions and lower input costs. We expect the roll forward of these actions together with more normal demand seasonality to drive sequential and comparable operating margin improvement.
In the second half.
Let's skip to slide five I will go through some detailed results on the quarter engineered products was down 8% organically in the quarter, the waste handling business posted a particularly strong quarter.
With prudent when proving chassis availability and aftermarket attachment rates driving solid growth in volumes and new orders. We are presently taking capacity reservations for 'twenty 'twenty, four and we'll be ramping production to meet demand progressively over the balance of the year.
Margins were down 50% 50 basis points year over year, principally driven by lower volumes in vehicle aftermarket, which offset the robust margin improvement in waste handling.
Clean energy and feeling declined 9% on an organic basis.
As the final quarter of ENV comps impacted.
Impacted the top line and margin mix.
Washington, Clean energy were down slightly in the quarter.
Distribution inventories were brought down in line with the increased cost of carry on higher interest rates channel checks indicate that we are now at appropriate levels for the next four expected second half demand.
Margins in the quarter were down 100 basis points of lower volumes and mix, but partially offset by significant cost reduction actions taken in the retail fueling business as we pivot this business to margin and cash flow maximization.
Imaging, an idea was flat organically a solid growth in our core marking and coding business in Europe , and the Americas as well as strong sales and software serialization.
Shipments in Asia were lower FX remains a negative headwind to absolute revenue and profits in this segment given its large base of non U S dollar revenue.
Margins in imaging idea was strong at 23%, improving 40 basis points on pricing and cost controls.
[noise] pumps and process was up 1% organically in the quarter with particular strength in polymer processing equipment precision components thermal connectors and hygienic dosing systems volumes.
Volumes in industrial pumps was softer due to channel inventory reductions Martin operating margin was down due to lower mix of Biopharma Todd.
Topline in climate and sustainability technologies was up 4% organically demand trends remain robust and heat exchangers and C. O two refrigeration systems driven by global investments.
Ability the segment posted a strong seven 2% margin quarter up 210 basis points year over year on strong volume conversion productivity and positive price cost and mix of products delivered passenger Brad from here. Thanks, Rich good morning, everyone.
I'm now on slide seven.
The top right shows our organic revenue decline of 3% driven by declines in engineered products and clean energy and fueling acquisitions contributed 1% to the top line in the quarter and FX translation was a 1% headwind.
FX headwinds resulted in <unk> <unk> negative EPS impact in the quarter and nine cents in the first half base.
Based on year over year exchange rates, we expect FX to be in eights and tailwind to EPS in the second half of the year.
From a geo perspective, the U S. Our largest market was down 9% in the quarter due to expected lower volumes in the <unk>.
The above ground retail fueling.
<unk> segment as well as lower shipments from vehicle services in North America.
Europe was down 1% and Asia was up 2%, China, which represent about half of our revenue base in Asia was up 5% organically in the quarter.
On the bottom chart bookings were down year over year due to formalizing lead times in our shorter cycle businesses and strong shipments against elevated backlogs in our long cycle and secular growth exposed businesses.
Now on slide eight our cash flows our cash flow statement.
Year to date free cash flow came in at $348 million or 8% of revenue and represents an increase of nearly $250 million year over year.
As discussed previously with supply chain is improving we have been actively working to liquidate our working capital balances in 2023.
We expect that trend to play out in the second half of the year as higher shipment volumes in the third and fourth quarter should result in a reduction of inventory balances between now and the end of the year.
This trend is in line with our normal seasonal pattern as cash flow generation has historically improved in the second half of the year.
Our forecast for free cash flow remains on track for between 15.
17% of revenue.
With that I'm going to turn it back to rich.
Go to slide nine here, we show the growth and margin outlook by segment for 2023 that are underpinned and where current trends backlog remains elevated across all segments.
Driven primarily by extended backlogs in our longer cycle and secular growth exposed businesses as our lead times continue to normalize and new capacity comes online. We expect these backlogs to continue normalizing through the end of the year.
We expect engineered products to return to growth in the second half of the year driven by continued strength in refuse collection vehicles and aerospace and defense.
Our waste handling business is fully booked for the year with a possible upside of chassis availability.
Weather improves we expect.
We expect vehicle aftermarket shipments in North America to recover after the temporary disruption in Q2 and the business should remain relatively stable year over year in the back half, we expect margins to improve in the second half on positive price cost tailwind solid volumes and benefits from our recent productivity capital.
It is taking hold.
And clean energy and fueling as expected returned to growth in the second half of the year against easier comparable periods as the end market conditions and channel inventories normalize quoting activity for hydrogen infrastructure components remains robust and we are working to expand capacity for select products, including vacuum jacketed piping.
And cryogenic valves, we expect full year margin improvement in clean energy and fueling driven by stronger performance in the second half on volume recovery improved mixed and continued proactive restructuring savings in retail fueling.
Since initiating our fundamental transformation of the retail fueling cost structure last fall, we have initiatives initiated or announced $60 million of structural cost reductions in this business.
Imaging and idea is expected to continue with stable performance, albeit against tougher comps in the second half driven by stable outlook and core marking and coding in serialization itself software fully full year margin should remain at attractive levels for this segment.
Pumps and process equipment is expected to remain roughly flat organically in the second half thermal connectors continued to grow at a double digit clip.
Some notable customer wins following a record Q2 precision components continues to book and ship at robust levels and where they.
Notable mixing business towards energy transition markets polymer processing is booked for the year.
Biopharma environment is improving with market conditions, such as FDA approvals for new promising therapies and recovery in biotech funding and inventory stocking all showing improvement as indicated by our customers well for released results over the past few days.
We expect margins in this segment to remain best in class levels with performance skewed towards the end of the year.
On stronger volumes and mix improvements.
Order rates in Biopharma will.
It will be the watch item from here with the potential recovery with.
With the potential for this recovery to be a material tailwind into 2024.
Climate and sustainability Technologies' topline trajectory is expected to be steady in the second half of the year. We are operating close to capacity and he'd ex heat exchanges for heat pumps with incremental capacity coming online over the next several quarters with direct labor at less than 10% of revenue conversion on growth and he.
Exchanges is compelling.
Demand for C. O two refrigeration systems remained solid and our and our capacity build out is on schedule. We are starting to have productive productive conversations for our door case business with large retailers for the 'twenty 'twenty four plans, which is an encouraging indicator of future demand beverage can making is expected to be.
Down as the industry is digesting recent record capacity additions. We expect continued margin improvement in 2023 on volume conversion productivity gains and improved mix and margin performance in refrigeration has been very encouraging even before the material accretive impact of North America.
<unk> C O two volume.
Let's go to slide 510.
[laughter] here.
Here is a was the confidence we have in the underlying components that drive our forecasted double digit EPS growth in the second half we have been we have been vocally vocal and about the negative impact of interest costs on channel inventories and have been encouraged that to draw down and while it had been headwinds in the first half.
Revenue has been orderly as end market demand is largely held up well.
Recognizing there are markets that are not immune to these dynamics, we have proactively enacted cost containment actions to derisk. The second half of the year and also provide 40 million of incremental carryover cost savings into 2024 with roughly half the savings coming from retail fueling as part of our strategy to pivot to margin and cash.
Flow maximization of this business we.
We believe our growth in conversion forecast has achieved based on our revenue visibility and backlog channel inventory stabilization secular growth tailwind and recovery in end markets.
So let's go to slide 11, our we view 2023 is a transition year for our business from a supply chain constrained inflationary high demand environment of 'twenty, one to 'twenty two to a more normalized activity supported by various macro trends as we move into the second half of the year. The majority of the Destocking headwinds behind.
And Rick crowd and recovery across several end markets. We are building solid momentum for 2024.
We are investing meaningfully behind our secular growth exposed end markets to ensure we have sufficient capacity to serve our customers and we are proactively engaging in new product development often in co development with our OEM partners to drive product improvement they win share in the marketplace.
We believe our Biopharma and retail fueling dispenser business, which are the face with expected market driven headwinds in 2023.
Poised for strong margin accretive recoveries in 2024.
All in we believe at least 40% of our portfolio is experiencing tail winds that are decoupled from broader industrial production with additional pockets of growth in our market, leading niche industrial franchises. This growth outlook together with the carry over benefit of cost actions into 'twenty four set up a solid foundation for our growth.
Prospects in line with our financial commitments from our Investor Day in March.
Let's move to slide 12.
With our supply chain and operational environment normalizing our forecast for 2023 embedded at a return to pre pandemic seasonality. The year has played out more or less as we expected thus far with more challenging half of the year now in the rearview mirror.
The path from here a straightforward underlying demand is solid across our business and we are confident in our ability to leverage our flexible operating model.
Centralized business systems to drive consolidated growth margin accretion to achieve our full year guidance, our inorganic pipeline remains robust.
<unk> committed to optimizing our business portfolio and are valid and then evaluating some interesting options, which we hope to conclude in the second half of the year.
That's it for me I'll turn it back to you Jack.
Yeah.
Shelby you can go to the Q&A.
And if he would like to ask a question simply press. The Star then the number one on your telephone keypad if.
If you would like to withdraw your question. Please press star two.
Ask that participants limit themselves to one question and one follow up question.
We'll take our first question from Andrew <unk> with Bank of America.
Oh good morning.
Morning.
Just a question one you know sort of negative bookings right and a revenue decline.
You know generally you know, there's destock takes more than one quarter and I. Appreciate that you do have visibility, but I think versus our model we were a bit surprised by the revenue. So what gives you confidence that this connection between bookings and destock that this is a one quarter event and.
Now sort of Cascade into Q3.
Yeah, I think if the D link the comments, we've made about destocking from bookings to a certain extent, so I mean, the bookings number.
As related to the reduction in the backlog is the backlog slowly deflate and we'd expect that to continue something so I wouldn't you know what I think we've been pretty vocal about that all year I think that what.
Has changed in the first half of the year is the realization that the carrying cost.
Inventory in the channel has gone up exponentially, but I'd say if you go take a look at the cost of financing inventory at a distribution level.
Got up by six or 700 basis points. So I don't think it's unique when a company like Dover says moving into this year that we're going to run for cash and deplete our inventories.
I think by and large everybody was was poised to do that I think that was underestimated was the short term negative headwind on the cost to carry.
By doing that where we've seen that and where we've done channel checks. We believe that the vast majority of that reduction on the cost to carry is behind us. So we don't have that negative headwind going in the second half of the year, but I wouldn't get all caught up on the bookings side, because the bookings are going to be reflective of.
The backlog decreasing and I think that they're likely to inflect positive likely in Q4.
And just maybe are looking and follow up on pumps and process can we just go and we're getting a lot of questions in there just by.
Verticals are just a little bit more visibility on bookings and revenue visibility into the second half because it is a big focus for investors, particularly the timing of Biopharma recovery. Thank you.
Yeah, well I mean, I think that if you go back and read the transcript there I called out that the watch item from here is going to be bookings and Biopharma right. So you know we've taken a look.
What our customers are saying and I think that you know if if you go back and look at the timing.
We've been suffering and lack of bookings there as our customers are prepared for the inevitable now they're beginning to call the bottom and I think that we were early in terms of the reduction of inventories of our expectation is that.
<unk> bookings inflect positive in the second half of the year on Biopharma, It's just going to be a question of the quantum on the industrial pump side I think that they suffered a little bit in terms of this channel destock.
Destocking again, we think that that's bottomed now as it's as a reference and then the one that you have to that really wags. The tail here is going to be polymer processing, where at one point, we almost had two years of bookings and our backlog and that's just been slowly deflating is we've shipped off that backlog.
So I mean, there's there's moving parts between long cycle and short cycle. The biggest factors going forward from here is clearly going to be on the biopharma side because to the extent that that and flex positive I think that we're all cognizant about the margin impact that has on the segment.
Now that said this your comments on sort of cost of capital and inventories fascinating one because the entire global supply chain has been floated at no interest rates can be fun to watch thanks, a lot rich.
Thanks.
Thanks.
And we'll take our next question from Andy Kaplowitz with Citigroup.
Hey, good morning, everyone.
And Richard maybe following up there you've been you know I guess somewhat cautious on the macro but you've now have a whole slide on Dover a strong foundation for 24. So maybe you could overlay your latest thinking on the macro versus that foundation would you say the macro overall is holding up better or worse than you expected and I know, it's early but given the backlog you have.
The additional restructuring benefits for 24, I think you've kind of mentioned that 24 could be in line with your sort of longer term algorithm, which of these 4% to 6% long term growth and 30% Incrementals does it feel like there's a higher probability of that for 'twenty four.
Yeah, I mean, if you go back and read the transcript I think I said that about four times, we think that we knew we had some kind of secular headwinds between the biopharma side and the ENV roll off that we had that coming.
It's part and parcel why I think that we were.
Pretty transparent of what we're gonna do to pivot, our fueling solutions business and <unk>.
And despite having the negative headwind on Biopharma, we have preferred we have preserved our margin in that business. So.
Any incremental volume that we get there should be very attractive.
Of the total macro.
Yes.
I guess, we're happy that that demand has held up right. I mean, I think you see part of the negative headwind to some of the Destocking because everybody is destocking because they were afraid of the macro to a certain extent I think that's been exasperated a little bit by that.
Our cost of capital working its way through the system, where we go from here.
Yes, we're positioning for a soft landing, maybe that's optimistic and not generally in our nature around here.
But we think the investments that we've made on our growth platforms as I mentioned in the presentation are growing at 20 plus percent and if we get some recovery.
On some of the secular headwinds we get then you can easily go back to what we had laid out as our financial objectives and you couple that with the fact that we've got a material amount of cost savings that role from 23 into 24, that's that's a pretty good start in terms of margin.
Okay. That's helpful. And then maybe you could just talk about the puts and takes you're seeing in D. C. S. T. Maybe you could you know.
You talked about maybe some potential incremental weakness in delta, but the rest of the business seems quite healthy I think he has a deep booking last quarter and door cases, whereas that you know do you still expect that in the second half and so.
So just talk to us about puts and takes of the business because he said overall, it's pretty good.
Sure look Bell back you know it was it was great while it lasted.
So we would expect that to you know, it's it's a cyclical business capex.
In this space is set to come down I think that you've got to be careful about what your margin assumptions are and Belle <unk>. Because we have had a lot of engineering project work that was not just equipment base equipment, we make some really healthy margins, but it was dilutive.
Basically goes to the revenue because we are more of it we've moved to be more of an integrator. So I think that we can we can while the topline <unk> decline I think that the margin preservation opportunity there is solid.
You know right now we're sold out and heat exchangers. If you go back again and look at the transcript here the leverage on the heat exchanges as it should be compelling.
<unk>.
Labor is 10% of our Cogs, So think about it that way about what we need to cover there again were growing at 20% I'll leave it up to the HVAC guys to talk about.
What the growth rates, because we see them all over the place around heat pumps, but the fact of the matter is we're in the midst of increasing our capacity somewhere in the order of 40%, 50% and it's all going to be in place by mid 2024.
So I think that will take care of any worries about what they see us cyclical.
Decline in Bell back is on refrigeration.
We had our highest margin performance ever at least in my tenure here in June .
And that is even before we've ramped capacity at our new plant for C. O two which I think I'm going to go to and Thursday, and Friday, and see where over here.
We're probably not going to see the benefit of the NAFTA C. O two meaningfully it's growing at like 80% right now, but it's off a really low base.
But our expectation is is that volume as it comes in is going to be accretive to margins in refrigeration.
So if I couple where we're exiting June in terms of core refrigeration in terms of margin and I add on what we expect to be a high growth platform in C. O two which we've proven we can do in in in Europe .
It looks good so far so and as I mentioned in my comments, we're having it.
The conversations right now.
<unk> core for refrigeration with our clients about demand for 2024, so far so good it seems to be quite positive.
Thanks, so much.
Thanks.
Thank you.
We'll take our next question from Joe Ritchie with Goldman Sachs.
Hey, guys good morning.
John .
Can we can we just maybe just go back to the ERP issue and rich, maybe just talk us through a little bit what happened this quarter and then it seems like it's largely behind you, but just wanted to make sure that there aren't any lingering effects in in Q3.
Yeah.
I've been doing ERP implementations for 30 years and they never go right. This one went a little bit more wrong than usual.
Look at the end of the day, I mean, I I own it right I mean, we basically put a bunch of capex into our main plant in Madison, Indiana, that's not completely done and at the same time I think if you recall the presentation, we made them.
About this business, we had at harmonize our skus meaningfully.
And quite frankly in retrospect trying to do in ERP, when you're doing all that work on the manufacturing floor was a miss.
Misguided on my part so that was just too much change to move to a.
New ERP system at the same time, so we have really trouble getting product out the door.
For the entire quarter, but it was it was it was worse at the beginning and we got progressively better as we exited June in terms of our production I don't I don't think it's gonna be a material headwind from here I don't think we're completely out of the woods, yet, but I don't think it's something that we'll be talking about about earnings from here.
We do ERP implementations year round here and we've been doing the Vermeer is.
Just I think it's my fault I think I've pushed one on a business that was too much to chew, but we're really excited about the opportunity that we have in E. Commerce in this business and you need.
Great ERP to affect that e-commerce change in kind of blew the plant up yeah, I'd just echo what rich said that you know we exited June at a pace that puts us on track for what we forecast.
For Q3.
And as he said in the script you can go back and look we're going to try to recover but we're not we're not forecasting a recovery of that $50 million. So.
Where we're being prudent in terms of the way, we think about the trajectory of that business in North America.
<unk>.
Got it no. That's helpful. Obviously always appreciate the transparency.
My my follow up comment I guess would be just around like the D V. P. S business. So.
The margin profile of the business is trending a little bit lower than you. Originally expected for the year is kind of think about the second half.
Kind of maybe maybe talk to us about the puts and takes on the margin side fully recognizing the biopharma partner.
<unk> Biopharma is the swing factor I think we've beaten that one pretty good and I you know youre going to take a look at what sartorius and Danaher and third I will talk about it. They are much more informed in terms of when the pivot is going to be I can tell you that.
We're prepared.
In terms of least operationally when the pivot comes we're in good shape there.
It's a little bit I talked about the fact that industrial pumps was down because of some unexpected destocking. We think that that's sort of done and then Conversely, you've just got the mix effect.
<unk> polymer processing.
And precision components did really well and they have been doing really well all year offsetting the negative headwinds and biopharma, but from a mix perspective, it just becomes dilutive to the margins. So weirdly, if they grow faster than expected the actual consolidated margin comes down but the absolute profit performance.
<unk> is entirely acceptable because even those two businesses are accretive to the consolidated portfolio margin.
Yeah.
Got it okay. Thank you.
Yep.
Yeah.
Thank you.
Well take our next question from Jeff Spark with vertical research partners.
Hey, Thank you good morning.
Hey, rich can we just kind of talk about the.
The margin progression a little bit sequentially. So I guess any P. Right you have about a 200 bps hit on the ERP issue.
Just kind of what the trajectory is out of Q2 as you normalize there and then on.
D. P. P. S. Right, you said margins up in Q4 year over year, I guess that implies they're still down year over year in Q3, but.
Would you expect sequential improvement in Q3 or is the margin improvement in D. P. P. S. All kind of Q4 weighted.
Okay, Yeah for D. E. P. You got it right. So that the margin decline in Q2 is solely on the fact.
On the on the V S G volumes coming out as we move forward from here, you've got the capacity ramp and.
Yeah.
ESG that comes through right. So that goes as the topline and that's let's call that at par margin for D. E. P. You got the recovery in DSG and based on our backlog we've got increased.
Margin performance in defense I guess as we ship against the backlog.
That basically gives you the answer for second half margin performance there on D. P. P. S right now our forecast show a negative headwind for Q3.
Solely on Biopharma.
And then our expectation as I mentioned in the comments, depending on order rates and everything else is that for Q4, we will do better based on mix and some recovery on biopharma because it's not as if we're not shipping anything in biopharma. Its just a comparative headwind rolls off by the time.
We get to Q4.
Right and then thinking about price cost rich Hum.
I assume that's sort of a kind of buried in your growth conversion you know in the bridge, but what's going on with price cost in the back half of the year.
The price benefit is less in the back half of the year and the cost is based on where we are we're tracking right. Now so we don't basically to make any assumptions in terms of other than leverage what we.
We don't make any assumptions about either positive or negative on the input cost, we'll just see how that develops over the second half.
Maybe just one last one I mean are the questions I, just ask about margins kind of get to Q3 versus Q4, but.
Since we all kind of you know we.
Q2 that you're kind of characterizing as in line with what you expected X. The ERP, but you know we didn't quite totally get the message right. So anything else you want to say about Q3 relative to Q4 or.
The balance between those two.
Sure, let's see how far you go I I understand we have gone all the stick I get about being negative all the time at these conferences and then apparently not negative enough.
In terms of segmenting the quarters I, you know look I think that Q4.
It is going to be higher than expected rally keep Q3 to Q3 is gonna be.
A lesson in line, but if you you know I'd I'd be careful of Q3 again for the reason I reason I mentioned right. So you've got the negative biopharma in Q3, which is it's not so much a top line issue, it's more of a margin contribution issue.
And then we've got certain businesses that we expect to ship heavy in Q4.
Which is part and parcel to this deployed at the end of the depletion of the inventory so.
You know without getting into giving out quarterly guidance I think I would I would I would be.
Cautious isn't the wrong word I, just think that we're going to have a better Q4.
There's likely in.
Models currently yeah. So it sequentially improves off of Q2 into Q3, but year over year like rich said.
We're looking at a more.
Comparable point on an year over year, but again, we're expecting margin improvement for the full year for the total company. So therefore.
Quarter.
Got it thank you.
And we'll take our next question from Steve Tusa with J P. Morgan.
Hey, good morning, Thanks for all the details.
Yep.
It's a little bit too to jeffs question on I guess from a sales perspective, I guess I'm struggling a little bit with is the sequential increase I mean, you gotta be up sequentially half to half, 9% you know gotta do I think like roughly 4.5 $4 6 billion.
In the second half and you're trending at that 2.1.
I'm just wondering like is that you're saying that's kind of all just out of backlog effectively and so you don't need this bookings number two.
To improve very much.
Well I mean like yeah, I don't think that we need to bookings to improve very much because you got to be really careful about the long cycle business. I mean, we do segments and as you know within the segments. We've got a mix of business. So you're going to have probably a pretty heavy depletion in backlog, let's talk about dps of <unk>.
Mark right at Maag sold out for the year, we're basically going to ship against that for the balance of the year. So it's going to make the bookings look a little bit negative now whether that would get offset.
We've got a lot of strength in bookings in precision components, and we would expect bookings to get better and biopharma, but we'll see whether that is a Q3 phenomenon or a Q4 phenomenon.
I would back up for a moment and go take a look at the presentation, we made and look at 10.
Slide 10, and take a look at what is required in terms of a conversion point of view and if you take kind of mid point, 30% conversion and you back into the number on the EPS accretion that we need in the back half.
It's not herculean right, because we almost have as much cost restructuring and cost actions is equal to what we need to get in terms of on the revenue conversion. So.
You know if we did not have that I think that would be a little bit of a tough part in terms of the revenue required in that conversion I think that all the work that we've done starting in the back half of last year has allowed us to be in the position of you know I don't know how the completely how the macro is going to dive right in here I mean, he's knuckleheads theyre going to go and raise interest rates.
Again, that's not helpful.
But the reason that we're confident about the back half is.
We've got almost we've got more than half of the required EPS conversion and cost savings that we've already enacted.
Right.
There are extra yeah.
You are correct its bookings right, but did.
Did you expect bookings to get worse from here sequentially or are we kind of bottomed on the bookings now.
[noise].
Hard to say.
Hard to say I mean, you could have flat bookings in Q3.
There's a there's an awareness layers or awareness in the marketplace that production lead times.
So you know what if if if I, if our bookings which are higher than normal basically backstop. Our revenue for next year and the vast majority of our portfolio you really don't need to start ordering until the beginning of Q4 now whether we can pull some of that in through market signaling and that's when we start getting into what are we going to do about pricing in 2020.
For you now.
What are we going to go out to the marketplace and say about swept flight.
Third Lee, we're sold out and swept but our bookings if you looked at our bookings and swept you would think that we have no bookings for Q4, just because that's the dynamic of how that business works, it's capacity reservation as opposed to bookings so I wouldn't get.
Excited about bookings I can tell you factually will will ship off the back of.
Bell Vac, and MOG, which will have a disproportionate negative.
Impact on those two segments the balance of the portfolio I would presume in the short cycle side, we're probably bottoming in bookings right now.
And then just one one last one for you rich just philosophically.
I mean, you know the slide 11 has like nine different businesses and that's only 40% of your portfolio. This has always been a bit of a complex portfolio, but the.
The amount of things that you've had to walk through today the amount of things that have happened in the last couple of quarters, whether it's the $90 million push out the ERP.
No and in somewhat obscure businesses, albeit pretty good businesses.
I think the only people that dislike having to dig into these little $100 million businesses.
More than more than it sounds like you talk about them is us maybe.
What point do you kind of really take a much closer look at this portfolio and just kind of.
To say it its just too complex to kind of.
Ron and manage let alone invest in them I think that's kind of one of the issues here that are that people are having is there just always something moving around you know yeah, no I get it and I'll I'll make I'll answer it two different ways I think if you go back and look at the transcript I talked about the portfolio and read what you like about that.
And I'll make an argument that in 'twenty 'twenty four the diversity of our portfolio will outperform.
Certain secular themes that it's going to be an advantage in 'twenty four it may not have an advantage.
Over the past 18 months, just because of the disproportionate.
Negative weight of Biopharma quite frankly.
But I'm willing to bet in 2020 for all the work we've done and the diversity of our portfolio would be an advantage as opposed to being kind of something that singular in terms of market exposure that may be easy to understand.
So can you grow double digit EPS in 'twenty four.
Too early to tell too early to tell but I think it's going to be dependent on the macro but I think that I can tell you that where we've invested.
We're really excited about what we're getting out of it.
And I think there are parts of our portfolio that have had negative headwinds you cant really see it be just because of the individual pieces that are really inflect. The other way. So I know that waste handling is not exciting, but the fact of the matter is that business could be up substantially in 'twenty.
Alright, the gauntlet to lay down <unk> 24 is the ear. Thanks rich I appreciate it.
Yes.
And we'll take our next question from Michael Halloran with Baird.
Good morning, everyone Hi.
Hi, Mike So the the short cycle side of things just some clarification here I think basically what you're saying is.
Sell out in the channel is actually pretty stable pretty healthy sell in because of the inventory destock side of things, that's where the headwind is in the expectation from here for that sellout piece to remain relatively stable I mean, that's a fair characterization.
Yeah, I mean, I think that the end market demand has been okay across you know from.
On the distribution side of the pole or a portfolio, but but sell out and sell the sell out metrics.
Good.
The channel checks that were getting is basically our distributors, saying the cost of capital on our inventory is just getting a bit much to bear here and we're going to wait because by the way. We know your lead times are down and we want the product we can get it from you and I look I get it right everybody is trying to maximize cash flow just because of the cost.
Of carrying that cash flow, including us by the way. So I don't think that distribution would be unique here I think the good news is is that the end market demand itself has remained pretty good overall.
Yeah.
Yeah makes sense and then just on the imaging side of things.
Like things are a little bit more sluggish there just some context and how much is tied to just a little bit tightening on the consumer side or any other variables that I've mentioned.
It's the one pay while one or two we have two businesses that have.
Out of a material exposure to China, and that's one of them and that is just a reflection mostly.
Demand in China being quite poor.
Thanks, Rich I appreciate it thanks.
We'll take our next question from Julian Mitchell with Barclays.
Thank you good morning, and I definitely listen to the the exhortation to check the transcript, but I wanted to to put a finer point on it on a couple of things. One was just third quarter sales rate. So we are assuming from what you said about shipping out of backlog in Q4 that sort of third quarter.
So a flattish sequentially and then you'll get this lift in the fourth quarter as the backlog depletes.
And we'll comment on bookings to be sort of flattish Q3, and then inflect, maybe Q4 was where there was sort of sequential comments as well I just wanted to try to win I, Yeah, I Julian I don't Wanna be overtly negative about Q3, alright, So Q3 is going to get sequentially better.
It's just that proportionally based on where we can see the orders and when they're due to ship that sequentially Q4 is going to be better than its been over the last I don't want to go back to 2020, I don't remember, but it's going to go back to the way, we looked pre pandemic, where we ship pretty heavily in Q.
Four and then it just becomes a question of production performance in Q4 and that is going to be dependent on.
You know what the order rates look like between Q3, and Q4 and do we have to start building out.
In Q4 for vault for volume for 24, now theres going be some businesses, where that's the case. So the businesses that were sold out this year, which is several portions of the portfolio. We're going to start taking orders for 24 relatively soon we're taking orders and right now in certain parts of the portfolio for that.
So you know I'm not I don't want to be overly negative on on Q3, I think Q3 is gonna be a good quarter.
But I think that Q4 at least comparably is going to be a better quarter.
I think the in terms of the order rates, it's more of a we'll see we know we're going to ship off backlog in Q3 pretty heavily so they may be book to bill maybe less than one it may not be and our expectation is is that Q4 should be up at least.
By definition income comparably.
That's very helpful. Thank you and then trying to switch away from bookings and backlog and so maybe just capital deployment that there hasn't been that much on you you'd mentioned sort of watch this space I think on M&A in the coming months you know, it's been a pretty moribund M&A environment for 18 plus months, so kind of you know.
How do you see that and then also did the Stoke wherever it is.
A lot of people, who view the valuation is undemanding kind of what's the appeal on on share buybacks, given the sort of solid outlook for 2024 that you've talked about.
Yeah.
Oh, our hierarchy remains the same.
I think we haven't added anything in terms of our Capex plans, because we've actually had good three or four years.
A lot of spending in terms of.
Recapitalizing, some portions of our portfolio and that's in our rearview mirror also by and large our capex as a percentage of sales.
It's coming down this year and it should continue that trajectory, even if even if I take into account the capex that we're building out on our growth platforms.
So that leaves M&A as the second hierarchy.
Competition is less than it there's not a lot of assets out there, but competition is less so P ease a bit stopped out right now for the reasons, we can understand.
So that we were looking at some attractive things here, but we're going to keep our discipline in terms of the return and clearly.
If you remember from last year, and we get to the mid year, we basically forecast our cash flow as we take a look at our deal pipeline and if you remember last year, we deployed.
How much was it a half a billion and half a billion and half a billion in an ASR in September of last year. So we've got a board meeting coming up and we'll go through all of those dynamics again and.
We'll decide what to do.
Great. Thank you.
Welcome.
Yes.
And we'll take our next question from Deane Dray with RBC capital markets.
Thank you good morning, everyone.
I do I do.
Sorry to beat on this ERP and I will check the transcript in case I missed it but just Brad you said youre not including two recouping of the 50 million that was disrupted this quarter does that go into past due or did you lose any of those orders.
You lose the orders down a lot of that is sold into distribution and the product is available.
You lose out on the water.
Okay coops some of it but.
You know I think that we will not recruit ball yeah. My commentary was more around or our view is the back half is not dependent upon recovery of the 50 million I want to be clear. That's the point really at the end of the day. The team there will try their best but you know it is it is.
It is a business that as rich says.
Our customer base stocks these things in distribution and they they move out and if there's if it's not there. They go to the next available.
Competitive unit, so that's the way we see it.
Alright, Thats really helpful and then Fred in the second half inventory draw down how much of that is coming just separately from filling orders versus reducing buffer inventory.
Are you able to size that.
Not explicitly but I think the way we're working through it is is that.
It's mainly it's mainly driven by <unk>.
I would say more towards tilted towards the safety stock levels, the buffer inventory in raw materials and the materials flow where.
What we have to see is less inflow versus production to draw it down and that's that's what's happening here in the second quarter.
We did have slightly negative inventory through the first half of the year, but it's a heck of a lot better than it was a year ago and we're continuing to make progress to make sure. Our production is in excess of the inflows that's the way we're working it.
Yes.
Thank you.
Thanks.
Yeah.
Okay.
Yeah.
Yeah.
I think that's it Jack.
Okay.
I want shoulder and final question from Nigel Coe with Wolfe Research. Please go ahead.
You sure do you want to finish it off but I'm trying to ask a question.
Uh huh.
I didn't want to cut you off.
My name and cut off right.
Okay.
On mute.
Yeah, Duane I'm kidding look.
Look we love your macro perspective, you were very early to be to be cautious and rightly so but it seems like some of the capex businesses that may be trending a bit weaker.
Yeah, Bareback Hill Phoenix, maybe just put some perspective on what you're seeing in those capital businesses and as you know is it is there.
Adjustments and higher rates Michael.
Macro uncertainty what what do you think how do you think this plays out.
Well I mean, I think that Bell Vac is a cyclical business. We you know we there was a you.
You know a lot of capital that was put in during the pandemic years into can making we did fabulous in terms of.
Market participation there versus our competitors, but we fully expect and have been preparing for over the last 18 months, where there'd be some roll down because you just can't keep at that kind of pace now having said that.
I don't think it's as negative story, either just because of the fact that the revenue was it was a bit influenced by some engineering work that we did at very low margins and while we sold the equipment and.
And we're actually working on some.
Interesting IP related projects that may.
It may help us out the right the capex.
And on the refrigeration side, we had that.
Order cancellations that we talked about at the end of last quarter that was very customer specific.
The balance of the demand is decent I think that there's a little bit of the same.
Frictional cost in terms of labor availability and installation that's not our problem, it's our customers' problem.
Pace of that Capex tends to be a bit choppy.
<unk> bought.
The conversations that we're having and I think it's in the in the transcript the conversations we're having about 'twenty 'twenty four in terms of demand in that particular space are good and I'm, just talking about kind of the old traditional case business without even getting into.
Natural refrigerants were.
You know we're growing at a very heady pace in North America right now off you know off a low base, but based on the conversations that we're having this.
We feel very excited about where this thing could go.
Okay. That's helpful quick follow on if I can retail appealing to you you mentioned focusing on margin and cash flow and obviously the restructuring actions that speak to that.
You've talked about this before but is this like a doubling down of that strategy as this become even more of a focus on cash flow as opposed to growth.
No I mean, I think we have individual strategies for every business that we have in the portfolio.
Well you know I mean, if you go back a couple of years ago. This was evs are taking over the world and the negative headwinds of ENB plus that.
The view of what these businesses were worth was I think a completely overdone, we think that we've got 20 years.
Of high margin opportunity into that space.
But having said that we're just repositioning that business, where we think that we've upgraded the entire product line globally by the way not just.
In the United States that we can run that we can run this business a lot more or a lot leaner more lean than we did in the past and that's the actions. He see US taking you know we think we can get this this that segment to 25% and you're seeing some of the building blocks.
Uh huh.
Working our way there.
Okay. Thanks for the questions.
Yep. Thanks.
Thank you.
That concludes our question and answer period and over second quarter 2023 earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.
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