Q2 2024 Dover Corp Earnings Call
Okay.
Please standby we're about to begin.
Speaker Change: Good morning, and welcome to Dover's quarter second quarter 2024 earnings Conference call speaking 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.
Speaker Change: 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 and then the number one on your telephone keypad. If you would like to withdraw your question. Please press star two.
Speaker Change: 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.
Speaker Change: I'd now like to turn the call over to Mr. Jack Atkins. Please go ahead Sir.
Jack Atkins: Thank you Jamie good morning, everyone and thank you for joining our call and 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.
Rich: Our comments today will include forward looking statements based on current expectations actual results and events could differ from those statements due to a number of risks and uncertainties, which are discussed in our SEC filings, we assume no obligation to update our forward looking statements with that I will turn the call over to rich.
Rich: Thanks, Jack I'm I'm on slide three second quarter results were solid driven by excellent production and shipment performance against our order books strong revenue performance was broad based across our end market.
Rich: And geographic exposures with four out of five segments posting topline gross organic revenue was up 5% for the quarter.
Rich: Bookings were up 16% organically year over year, continuing their upward trajectory over the last several quarters and bolstering our confidence.
Rich: And our second half outlook.
Speaker Change: Arjun performance was excellent up 200 basis points over the prior year to 22, 1% driven by volume leverage organic and inorganic mix proactive cost management and rigorous productivity actions.
Speaker Change: Our strong operational results were complemented by ongoing portfolio evolution actions.
Speaker Change: Over the last week, we have completed two strategic bolt on acquisitions, enhancing our clean energy components platform.
Rich: Adding applications in highly attractive end markets, expanding our global reach and strategically expanding our manufacturing base into new regions.
Rich: They also recently announced the sale of our environmental services group business unit for $2 billion in cash.
Rich: This transaction together with the sale of the stake or in March of this year reflects our intention to reduce our exposure to capital goods. We have monetize these businesses, where we have material improved operating performance at attractive exit multiples, while methodically migrating our portfolio toward higher organic growth and margin opportunities.
Rich: Yeah.
Rich: We are approaching the second half of the year constructively.
Rich: End market demand is healthy and is supported by our sustained order rates. We are therefore, raising our adjusted EPS guidance.
Rich: Two $9.05 to $9 20.
Speaker Change: I'll skip to slide four.
Speaker Change: Engineered products had another robust quarter, driven, particularly strong volume growth and conversion of waste handling and aerospace and defense.
Rich: Volumes of vehicle aftermarket grew in recovering European market conditions and improved production performance, we expect volumes to remain strong for the segment through 2024.
Rich: Margin performance was solid in the quarter on strong volume conversion favorable mix and productivity.
Rich: Clean energy and feeling was up 2% organically in the quarter and solid volumes in clean energy components, where we're starting to see robust quoting activity and order rate momentum from component parts tied to large projects.
Rich: Hydrogen and cryogenic applications.
Rich: Volumes were also solid software systems.
Rich: And above ground retail fueling continued its positive recovery, particularly in the U S.
Rich: Margins were flat in the quarter as proactive cost could tell Ed curtailment also had volumes and mix.
Speaker Change: Imaging and I'd posted an excellent quarter on growth in serialization software and strong shipments for marketing and marketing in marking and coding consumables and aftermarket parts.
Rich: Printer shipments were still says subdued improves sequentially and should inflect positively in the second half.
Rich: Margin performance was exemplary on SG&A leverage and a higher mix of consumables and aftermarket shipments.
Rich: Pumps and process solutions was down organically as expected principally due to lower shipments in our long cycle.
Rich: Polymer processing business, partially offsetting these headwinds were significant growth in shipments and new bookings for thermal connectors.
Rich: Tied to AI chip liquid cooling applications and data centers as well as a solid quarter and precision components, both orders and shipments of single use biopharma components grew sequentially and year over year, continuing to post COVID-19 recovery.
Rich: Margins in the segment were up on mix and operational execution.
Rich: Top line performance in climate and sustainable sustainability technologies outperformed our internal estimates due to an exceptional quarter in food retail.
Rich: Which nearly offset the capital investment slowdown in beverage beverage can making an impact of destocking headwinds in the broader HVA complex.
Rich: Most notably in European residential heat pumps on our European Braves plate heat exchanger business. We expect these headwinds to persist in the second half with heat pump related shipments trafficking in the third quarter.
Rich: Margin performance was exceptional driven particularly by food retail, which posted all time record margin in the quarter on strong flavor with merger and conversion and a greater mix of C. O two systems shipments.
Rich: Passenger Brad here, Okay, I'm on slide six.
Brad M. Cerepak: The top right shows our organic revenue growth of 5% to the stake sale, which was closed on March 31st more than offset acquisition related revenue of nine by $9 million, while FX was a headwind of approximately $13 million.
Speaker Change: From a geographic perspective, the U S. Our largest market was up 11% in the quarter on.
Brad M. Cerepak: Solid broad based activity with particular strength in waste handling and food food retail.
Brad M. Cerepak: Europe, and all of Asia was down, 4% and 9%, respectively, China, which represents half of our revenue base in Asia was down 8% organically in the quarter, primarily due to shipment timing within polymer processing.
Rich: On the bottom of the chart bookings were up year over year of no orders were also marginally up sequentially.
Rich: On an organic basis quarter to quarter.
Rich: Below the line items negatively impacted our earnings in the quarter driven by a higher tax rate as well as higher corporate costs net of interest due in part to elevated deal expenses.
Rich: Now on our cash flow statement slide seven.
Rich: Adjusting for taxes paid on the gain of the steak go which are non operational in nature, our free cash flow came in at 10% of revenue in the quarter up 64 million year over year.
Rich: Year to date adjusted free cash flow is essentially flat versus the prior period. Despite investments in working capital due to shipment timing driving higher receivable balances as well as investments in inventory due to strong bookings rates.
Rich: We expect to materially liquidate our working capital balances over the second half of the year and are on track to deliver our full year adjusted free cash flow guidance of 13% to 15% of revenue.
Rich: I'll turn it back to rich thanks, Brad I'm on slide eight.
Rich: Here, we provide some visibility into the contribution of the portfolio of both the ESG divestiture and the recently closed acquisitions and clean energy components providers Marshalls Excelsior into Mako.
Rich: These transactions continue our purposeful portfolio migration away from capital goods towards higher gross margin less cyclical and higher growth component businesses that serve secular advantaged end markets.
Rich: We have been methodical and disciplined in our approach to enhancing the portfolio through acquisitions and patient in our strategic divestitures we.
Rich: We are pleased with the valuations of our two recent divestitures within engineered products ESG announced on Monday and to stagger, which closed in March.
Rich: At both achieved above 13 times trailing EBITDA multiples significant premiums for capital goods assets.
Rich: The transaction details are on on the page due to the timing of the ESG signing and uncertainty of the closing date, we have left ESG and our full year guidance for now we expect to move ESG to disk it's.
Rich: Discontinued ops.
Rich: In Q3 earnings report and we will recast our history historical financials and guidance at that time.
Rich: ESG earnings profile as shown on the page and importantly, we're not including any benefit of the transaction proceeds toward value added capital deployment.
Rich: We believe we are entering a 12 to 18 month period and represents a unique buying opportunity for attractive assets, including many private equity owned businesses that are overdue for exit and our highest priority areas inorganic expansion.
Rich: Our current balance sheet strength and cash flow forecast reinforced by the proceeds of the ESG divestiture positioned us well to remain on the front foot in pursuit of attractive capital deployment opportunities.
Rich: Go to slide nine I.
Rich: Wanted to pay a little more color on our collection of businesses that provide critical flow control and safety components for industrial gas cryogenics.
Rich: Natural gas and clean energy applications.
Rich: These businesses spanned across both our pumps and process solutions and clean energy and fueling segments. So there is significant commonality and industrial tailwind and business models.
Rich: These businesses provide highly engineered components that are demanding applications in the broader clean energy.
Rich: And industrial gas complex is and they are growing requirements for sustainability emissions reduction and safety that create favorable product loyalty dynamics and innovation opportunities for us.
Rich: Our positions in these attractive markets are supported by strong and recognized technological and application expertise and intellectual property.
Rich: Large installed bases that drive reoccurring replacement demand as well as exposure to high growth uses like hydrogen and LNG.
Rich: We have been active acquirers in this space investing roughly $2 billion over the last several years. We believe these investments should generate mid to high digit growth at margins accretive to our consolidated portfolio over the long run.
Rich: This remains a high priority area of investment for us moving forward.
Rich: In light of our recent divestitures with the scale of this critical component platform now reaching $1 billion of revenue, we intend to readdress. Our current segment structure in the near future to add focus and disclosures around our growth platforms.
Rich: Slide 10 provides a little bit more color on Marshall Excelsior, the larger of the two energy businesses that we have card in the last week.
Rich: Acquisition, broadens, our portfolio and cryogenic valves and other components and expands our participation in several applications.
Rich: Including the expansion into remote monitoring monitoring and digital controls and cryogenic transport and severe duty valves, providing an excellent opportunity for cross selling.
Rich: Integrating <unk> into our existing clean energy platforms and centralized support functions should provide significant cost savings.
Rich: We expect to capture about 12 million in run rate synergies driving mec, the high Twenty's margins and high single digit ROIC by year three.
Rich: Taking a step back shows the broad scope of our offering within clean energy applications. We're supplying a variety of safety critical components like valves regulators nozzles loading arms dispensing and gas handling equipment for a variety of applications across the high the whole cryogenic gas value chain from production.
Rich: <unk> to consumption.
Rich: We serve both gas and liquefied gas applications with multiple molecules handled including LNG hydrogen propane oxygen and nitrogen among others and we're benefiting from strong investment momentum.
Rich: The industrial gas majors, and the and global government infrastructure spending.
Rich: While a smaller deal for us to Mako as Al also closed last week, providing us the very important European base of manufacturing.
Rich: To enhance our growth and global scale.
Rich: Finally on slide 12 shows the long term performance of the portfolio. We continued to deliver earnings growth through a combination of topline organic growth margin improvement through operational execution and returns on productive capital deployment strategies that methodically improve our portfolio over time.
Rich: Our strong balance sheet position will be further enhanced by the proceeds of the ESG divestiture in the second half of the year, we expect to end the year with approximately $3 billion in capital deployment firepower from cash.
Speaker Change: And reasonable leverage levels, we have a number of levels levers available to deliver the second half of the flexible business model that can quickly respond to changes in our dynamic markets I'd like to end by thanking ESG President Pat Carroll and his entire management team for the value they created for Dover shareholders.
Speaker Change: Their tenure.
Speaker Change: Let's go to Q&A.
Speaker Change: Thank you if you would like to ask a question simply press. The Star then the number one on your telephone keypad.
Speaker Change: You would like to withdraw your question. Please press star two we ask that participants limit themselves to one question and one follow up question.
Speaker Change: We'll go first to Andy Kaplowitz with Citigroup.
Speaker Change: Okay.
Speaker Change: Your line is open.
Andrew Alec Kaplowitz: Can you hear me okay.
Andrew Alec Kaplowitz: Hi, Andy can vary Andy go ahead.
Rich: Rich maybe you can talk about bookings cadence during the quarter and how youre thinking about bookings growth going forward do you still see book to Bill over one times for the rest of the year and then as I'm sure. You know it took them I can see them all over the place. So what are you seeing macro wise and would you say that builders outperformance is really a result of dover's unique exposures versus <unk>.
Speaker Change: Lot of macro improvement.
Rich: Yeah, I would expect it to be over one as you know I think that our comps are easier in the second half of the year from an order basis, it's been a little bit lumpy I have to say.
Speaker Change:
Speaker Change: Intra quarter, so we'll see how it goes but our expectation is to be over one for the balance of the year and I think that's reflected if you take a look at our full year forecast in terms of revenue growth and everything else.
Speaker Change:
Speaker Change: The outperformance I look I mean, I think at the end of the day.
Speaker Change: We lead in we led out and we're probably leading energy again, so as we've discussed previously I think that our inventory positions.
Speaker Change: Well placed and some of the markets that we have exposure to that.
Speaker Change: Suffered over the previous 24 months are making a turn.
Speaker Change: We add on top of that some of the growth platforms like we have like thermal connectors and C O two systems.
Speaker Change: Which are performing very nicely and so I don't I think it's.
Speaker Change: I'll step away from the rest of our competitors in the macro I just think its unique to our portfolio.
Speaker Change: Maybe just following up on that last comment rich can you give us a little more color on what's going on in D. C. S. T. Obviously.
Speaker Change: Just mention CRT systems food retail in general is driving the outperformance, but how is it trending versus your original expectations for the year does the strength in food retail actually more than offset the continuing weakness in heat exchangers to end up leading to upside in that segment.
Speaker Change: Yeah look I think that when <unk> was well known going into the year and that was part of our plans I think there was a lot of mixed signals.
Speaker Change: Around heat exchangers, I think we've done a lot of work there. That's why I think that we're pretty confident to call. The trough in Q3, and we would expect order rates actually to move up hopefully at the end of Q3, but it clearly into Q4.
Speaker Change: I think on the food retail business.
Speaker Change: I think that C. O two is doing pretty much as planned I think that what's doing better than plan as the margin performance of the business has just been exemplary.
Speaker Change: Through the quarter. So that's why when you look at the consolidated results I don't think that we would expected.
Speaker Change: Food retail to offset the margin dilution from from heat exchanges, but during the quarter. It did which is excellent.
Speaker Change: I appreciate the color.
Speaker Change: Thanks.
Speaker Change: We will go now to Jeff Sprague with vertical research partners.
Jeffrey Todd Sprague: Hey, Thank you good morning, everyone.
Josh: Hey, Josh.
Jeffrey Todd Sprague: Hey, Rick just thinking about slide 11, and everything you've kind of done here on gas and cryo and everything.
Speaker Change: Youre characterizing it as kind of a component driven strategy and I get that margins are often very very good and components, but it looks like you're also stitching. It together with some automation and some other things. So maybe just kind of talk about.
Speaker Change: What else if anything you know you need or want to do here as we think about another $3 billion in capital to deploy as it sort of all in the same ZIP code or are there other kind of M&A vectors, we gotta be thinking about.
Jeffrey Todd Sprague: I'm I'm hesitant to say well, it's a couple of things, Jeff what we're gonna do.
Jeff: Whether it's before the end of the or very early in next year I guess I think you heard from my comments that we're intending to re segment.
Speaker Change: And to give some more visibility here.
Speaker Change: When we do that we're going to make an investor presentation I'm loath to say, what we're interested in because this area has gotten.
Speaker Change: Some intention so in an area that over the last previous couple of years, where we've been a buyer now we've got some competition in this space.
Speaker Change: So I guess I'll I'll take a pass on saying, what we'd like to do in the future because I'm not interested in attracting any more interest there.
Speaker Change: And then one of the things we've seen out of Dover, though rich also is when you put these stakes in the ground.
Speaker Change: You turn it up organically.
Speaker Change: I mean with your kind of flow and other competencies here is there sort of a lot you can do organically to kind of expand your scope here or it would be mostly an M&A driven strategy.
Speaker Change:
Speaker Change: It's too that there's two strategies here I think that as I mentioned in the comments are we believe.
Speaker Change: Within 24 months, we can get this entire cluster of businesses some of which are already performing here, but the entire cluster up into mid Twenty's EBITDA margin and that'll be through number one we think it's a growing areas, we're going to get some volume leverage there, but I think once we put the argued Dover playbook on.
Speaker Change: Yeah.
Speaker Change: Back office integration and all the things that you know about I think that you know within you know 18 24 months, we can drive the entire segment up there.
Speaker Change: Yeah, and just a quick one on this whole heat pump question.
Speaker Change: Thinking about Europe, specifically, the whole business broadly the bottom in your business or it's the bottom then your customers business that whole kind of lead lag equation, everybody has been trying to sort out.
Speaker Change: Yeah, Yeah well.
Speaker Change: It's unfortunate that we were all never aligned between the components manufacturers in the end market, but the fact of the matter is we like I said in the comments we've spent a lot of time.
Speaker Change: On trying to determine total inventory in the chain.
Speaker Change: We believe that the.
Speaker Change: And it is mostly European heat pumps, because thats the vast majority of the volume in the first place heat pumps North America, and then the balance in the world.
Speaker Change: Proportionately is relatively small so we think that we trough.
Speaker Change: In terms of volume in Q3, and our expectation based on discussions with our customers that.
Speaker Change: That inventory has been flushed and we'll go back to positive orders in Q4.
Speaker Change: Great. Thanks for the color.
Speaker Change: Thanks.
Speaker Change: We'll go now to Steve Tusa with Jpmorgan.
Charles Stephen Tusa: Hi, good morning.
Charles Stephen Tusa: Hi, Steve.
Speaker Change: So as far as the orders are concerned.
Speaker Change: Just give us some ice.
Speaker Change: I missed the first couple minutes of the call. So you may have said this but just some color on how you expect them to.
Speaker Change: To trend sequentially and then.
Speaker Change: Should we expect normal seasonality off of that.
Speaker Change: In the fourth quarter.
Speaker Change: Look I think that book to Bill should remain one or higher for the balance of the year I think that we have.
Speaker Change: In Q2.
Speaker Change: I think we actually did a little bit better than I would expect it in terms of production performance and the shipment and that's why it drove.
Speaker Change: The 5%, 8% organic growth and that's that.
Speaker Change: That changes the metric, but I think that the order rates. We've got a good handle on I think we stay above one for the balance of the year Q4, generally is going to be a proxy on everybody's macro outlook of 25, but as I said before I think that we roll into some easier comps than and something like swept.
Speaker Change: Should turn positive finally in Q4, if not at the end of Q3 and I think the momentum that we're going to have in thermal biopharma with the momentum we havent Seo to all will contribute to two staying above one.
Speaker Change: Okay, and then just just in the quarter I know you guys had said.
Speaker Change: Flat.
Speaker Change: Sequentially, you were down a little bit I know thats kind of nitpicking, but what what was the what was slower for you guys and that orders.
Speaker Change: The one or two things that held that back a bit.
Charles Stephen Tusa: Steve I'd have to go through it I am sure that somebody took some outsized big orders in Q2 over the previous comparable I'd have to go dig through I'll get Jack to follow up yeah, What we said organically it was sequentially up.
Charles Stephen Tusa: Marginally so you got to take into effect.
Speaker Change: The disposition of the state go the acquisition timing within the quarter.
Speaker Change: And also FX, which was higher than we expected in the quarter Steve.
Charles Stephen Tusa: Yeah got it okay makes a lot of sense. Thank you.
Speaker Change: Thanks.
Andrew Alec Kaplowitz: We will go now to Andrew <unk> with Bank of America.
Andrew: I guess good morning, Hi.
Speaker Change: Hi.
Andrew: Just a question about sort of acquisitions, you sort of increasing your exposure.
Speaker Change: To Green energy, but you know I think our sense is that at least for now a lot of these.
Speaker Change: Warner's are being that order. It's just a lot of these projects have been pushed out over regulations sort of visibility on taxes visibility on funding.
Speaker Change: Clearly, it's an informed bet and I think in May at our event in New York you definitely talked about that quotation activity is very very robust can you just sort of talk about you know what it is youre seeing over the next 12 to 24 months.
Speaker Change: That.
Speaker Change: Makes you commit capital to this sector and to make it clear we're quite excited about it but it does seem that near term. There are some push outs just give us your view because you know you you tend to think about these things. Thank you Andrew.
Speaker Change: Look I mean at the end of the day you can't when the market's there it's too late to buy anything right. So you need to basically take some bets.
Speaker Change: On what you think it's got secular growth behind it. So if we think about the thematic <unk> at the end of the day.
Speaker Change: There's a whole stream of electrification, we're not chasing that mean.
Speaker Change: Meaningfully.
Speaker Change: <unk> had a presence in the in the gas sector for decades. So we know the customers we know.
Speaker Change:
Speaker Change: The regulatory environment around it and everything else. So we're big believers in the.
Speaker Change: You know the electricity is got to come from somewhere and we're big believers that the total gas complex is going to be an important contributor there. What we're buying are our large installed bases at the end of the day we're not.
Speaker Change: Paying on the come to a certain extent.
Speaker Change: But cryogenic components and vacuum jacketed piping.
Speaker Change: We're kind of niche businesses in the past, but to the extent that cryogenic gas applications continues to expand we would expand.
Speaker Change: We're buying these things and we're expanding capacity on top of them as we do it so.
Speaker Change: If we get the timing off a little bit so be it at the end of the day I think from a secular point of view.
Speaker Change: We're pretty confident in what we're doing.
Speaker Change: Alright, Gotcha, and then maybe a little bit more color on what Youre seeing on D. P. P. S.
Speaker Change: Right, you sort of highlighting our year over year growth in Biopharma.
Speaker Change: And then clearly I think you're sort of talking about thermo connections.
Speaker Change: So what kind of growth can we think about just two part question what kind of growth can we think about thermo connections can this business actually double over the next 12 months on cycling on Biopharma when do we actually start growing year over year. Thank you.
Speaker Change: Well, where we should grow year over year right. This year.
Speaker Change: Consider we probably bottomed at the in the mid to late 2023.
Speaker Change: So that's good news and then the thermal luck its a small base, but at the end of the day.
Speaker Change: You know our bookings are up significantly.
Speaker Change: And we would expect.
Speaker Change: Total revenue and earnings to be.
Speaker Change: On target to what I think I gave you some numbers at the end of Q T. At the end of Q2, and we're tracking that way.
Speaker Change: Thermal.
Speaker Change: Yeah.
Speaker Change: It's going to be interesting right because back to your question before between all of the hype of everybody talking about it and then the lag period.
Speaker Change: I think that we're on the front foot for production capacity I think we've got clean.
Speaker Change: Clean room production capacity I think that we're going to be able to have 100% traceability by the end of the year, which should separate us.
Speaker Change: For a lot of people that are going to try to get into this business. So you know.
Speaker Change: If I step back of Dps in total we knew that maag was cycled down after three or four year run coming up.
Speaker Change: Industrial pumps is I would call it not robust right now, but that has been offset by <unk>.
Speaker Change: Precision components, which is really part of the exposure that we've got into the gas complex and the mix effect of both biopharma and thermal connectors.
Speaker Change: Thank you very much.
Speaker Change: Thanks.
Speaker Change: Well go next to Scott Davis with Mindless research.
Speaker Change: Okay.
Scott Reed Davis: Hey, good morning, Rich and Brad.
Rich: Hey, Scott good morning.
Speaker Change: Wanted to go back to.
Speaker Change: I think the second derivative Jeffs question really on slide 11.
Speaker Change: Are there Chan.
Speaker Change: Channel synergies or the synergies that are kind of.
Speaker Change: You know tangible when you when you just look at the assets on this page.
Speaker Change: I was just.
Speaker Change: Commonality of end markets are there actually some.
Speaker Change: Tangible synergies and benefits of bringing them all together under one segment.
Speaker Change: Assuming you do bring them together.
Speaker Change: Alright.
Speaker Change: We bought rigo and Acme at the end of 'twenty one.
Speaker Change: El Mech basically is an overlap adjacency.
Speaker Change: To that to those prior period acquisitions. So it's just I think about just adding a bunch of new products under our footprint that we already have there is a manufacturing footprint opportunity there clearly.
Speaker Change: Both.
Speaker Change: Inbound and reverse synergy in the map on the footprint. These are global businesses. So part of the reason that we did the Mako is you just can't say I'm in North American provider you have to have when youre dealing with companies like Lindy you need to have a European presence. So thats why we purchased the Mako as that kind of make our.
Speaker Change: And Europe larger at the end of the day and so what we're kind of building.
Speaker Change: A lot of the times, they're the same customer a lot of the times are there adjacencies, but the they're the regulatory and safety requirements to build those kind of components are very common and it's just an ability that we have.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: And just following up with you know Youre bullish M&A comments, I think last quarter it.
Speaker Change: There's training misdirection too I mean.
Speaker Change: Is that a commentary more on asset availability or valuation or both.
Speaker Change: More asset a valid availability I mean like we've been hearing about it was supposed to be 23 than it was supposed to be 24, and now we are beginning to see assets coming out of PE, but our expectation is the process is going to accelerate I think everybody has been waiting.
Speaker Change: For an interest rate cut to kind of flex it I mean in the equity markets have been doing relatively well and that is helpful. In terms not to wash in terms of buying but it is helpful for exit from our point of view so.
Speaker Change: We've been kind of waiting for this opportunity for a couple of years now and I think that we're kind of bullish that we will see if we get them done right, we're going to not start throwing money around like drunken sailors, but I think that we're on the front foot of I think theres going to be a lot of opportunity going forward and now with the monetization of ESG where.
Speaker Change: You know, we're a cash buyer so that puts us in good spot.
Speaker Change: Yeah. Good luck. Thank you. Thanks.
Speaker Change: Well hear next from Brett Linzey with Mizuho.
Brett Logan Linzey: Hi, good morning, all.
Brett Logan Linzey: Yeah, I just wanted to come back to the ESG divestiture. So you called out the dollar dilution to adjusted EPS on slide eight you've announced it a couple of deals here. How are you thinking about the backfill do you have line of sight to more than offset with M&A or should we think about a balance of repo and M&A.
Speaker Change: I think that our bias would be towards M&A, but.
Speaker Change: I think we've got a history of we don't sit on cash for a prolonged period of time. The good news now is unlike a couple of years ago, we actually get some yield off our cash.
Speaker Change: And the clock back cash three years ago, you got nothing for it so yields right now on cash balances, let's just call it 5% or so that's not bad.
Brett Logan Linzey: So we can be a little bit more patient if you will and if you heard me answer. The last question, we think theres going to be a lot of M&A opportunity coming forward. So I think our our biases.
Brett Logan Linzey: Probably a lot more towards M&A, then than share repurchase than it's been over the previous three to four years.
Speaker Change: Okay, Great and then just a follow up on free cash flow. So thinking about the composition of ESG out some of these more recurring businesses into the mix how should we think about free cash flow margin as you evolve the portfolio and youre buying more more recurring cash flow.
Speaker Change: I mean, I'd like the ESG actually from a from a working capital point of view is a pretty good performer.
Speaker Change: But so the benefit would be on the gross margin right. So what we are bringing in gross margin up so profitability up so the like for like swap of dollar of revenue should be better from a cash would be better yeah.
Speaker Change: <unk>.
Speaker Change: Great good quarter. Thanks.
Brett Logan Linzey: Thanks.
Brett Logan Linzey: Next we'll hear from Julian Mitchell with Barclays.
Julian C.H. Mitchell: Hi, good morning.
Julian C.H. Mitchell: One <unk>.
Speaker Change: Segment that doesn't get a little at a time is D. II, but it had to you know very impressive bookings organic sales growth margin performance in Q2.
Speaker Change: And I suppose on the revenue front.
Speaker Change: Good turnaround year on year from what happened second half of last year and into Q1 of this year.
Speaker Change #116: So I'm just trying to understand that.
Speaker Change: Those drivers there.
Speaker Change: And again comps are pretty easy in the second half and in the sales and the bookings growth was good in Q2, so I'm just trying to understand kind of how strong.
Speaker Change: Would that growth be in the back half.
Speaker Change: And I realize those incrementals are exceptional.
Speaker Change: The green with mix.
Speaker Change: But should we see at least very strong incrementals again in the second half.
Speaker Change: Yeah, that's hard to say right I think at the end of the day you have a pretty strong mix effect in Q2 right.
Speaker Change: Alright, because of consumables being proportionately higher than kind of average printer shipments actually dilute margins at the end of the day. So they're per dollar shifting values higher but the margin dollars per revenue comes down a little bit.
Speaker Change: We're really happy with the margin performance.
Speaker Change #101: You know this business over the long run is a steady Eddie I think the management has done a great job of moving the margin up through more or less efficiency more than anything else. So we would expect that to continue.
Speaker Change #101: But I wouldn't be surprised if you saw a little bit of margin dilution in the second half, especially a printer shipments move up proportionately to two.
Speaker Change #102: The consumables mhm.
Speaker Change #100: Thanks, and then just.
Speaker Change #104: I know you didn't give much.
Speaker Change: Understandably you didn't give much color on the sort of quarterly cadence of earnings.
Speaker Change: We're halfway through the year and the seasonality has been confusing in recent years. So I just wondered sort of you know.
Speaker Change #111: When we think about third and fourth quarter total Dover earnings sequentially. If you like an easy sort of Q3 up a bit sequentially on earnings and then down sequentially. In Q4 is that the way to think about it yes.
Speaker Change #103: Well the way, we think about it is Q1 Q.
Speaker Change #103: Q2, and Q3 tend to be up and then Q4, usually is a flex quarter and it depends on oil.
Speaker Change #103: Order rates and whether we drive for cash are really bullish on 25, and whether we build inventory or not in Q4, I would you know I think that that kind of.
Speaker Change #103: <unk> performance is going to hold for this year.
Speaker Change: And that's what we've built into our forecast.
Speaker Change #106: That's great. Thank you.
Speaker Change: Yes.
Speaker Change: We will go now to Joe Ritchie with Goldman Sachs.
Joseph Alfred Ritchie: Hey, guys good morning.
Speaker Change: Yep.
Speaker Change: Hey.
Joseph Alfred Ritchie: I'm going to start on ESG, because rich I guess I was maybe I was saying we want to be surprised that you guys ended up selling the business have you thought of it as being a good margin good return type business.
Speaker Change #113: I'm curious kind of what went into that decision.
Speaker Change #105: As you've thought about or by evaluating that asset over the long term.
Speaker Change #105: Yeah.
Speaker Change #105: I don't know Joe I think that we've been.
Joseph Alfred Ritchie: Fielding questions on the capital goods portion of our portfolio as long as I've been here and we had said lease.
Speaker Change #108: At least initially that we thought that we could improve the performance of the business. So.
Speaker Change #108: That we were going to be patient and wait and if someone was interested in it that we're going to wait to make sure that we are paid appropriately for it.
Speaker Change #105: I mean, I know that Theres, a lots of different calculations about what we were paid but the bottomline is on a call. It a Q1 exit LTM basis, We got 13 times EBITDA.
Speaker Change #112: And you know I come from capital goods, So the three premier companies and capital goods in the United States, our Pac or Deere, and Caterpillar and look where they trade at an EBITDA multiple basis, so at that point.
Speaker Change #105: We think that we can monetize there.
Speaker Change #105: We should because at the end of the day from a summer parts point of view, we get a capital goods multiple on that business. It's one of our.
Speaker Change #105: I don't want to talk to business down because of the management team did a phenomenal job in terms of the performance of it but the bottom line is it's one of our lowest gross margin businesses in the portfolio so to the extent.
Speaker Change #105: That we need to kind of mix up over time.
Speaker Change #105: And we are paid appropriately I think that thats the way we look at it.
Speaker Change #105: Okay.
Speaker Change #110: That's super helpful. And then I guess just.
Speaker Change #118: My follow up question, and maybe just kind of talking about some of the other longer cycle piece of that would be a portfolio. Some thinking flat dull back in March.
Speaker Change #114: What's kind of the expectation embedded into guidance for growth for those businesses. This year and is it too early to maybe start talking about 2025, and what those businesses could do.
Speaker Change #109: Well look I think that swept.
Speaker Change #117: The brace heat exchanger heat pump debate I think it's been beaten to death at this point everybody got very excited that the problem with having exposure to.
Speaker Change #109: Two subsidized products.
Speaker Change #124: Great when they subsidize its not so great. When they are not subsidized. So we're just going to have to deal with that so if I take that away.
Speaker Change #109: And I looked at swept over time, we actually don't think that that is a.
Speaker Change #109: Cyclical.
Speaker Change #109: Long cycle business, we think that that's just a component parts business. It just went through a kind of.
Speaker Change #109: And adoption rate on heat pumps through legislation in Europe that we have.
Speaker Change #109: Not going to apologize for when the market was there.
Speaker Change #109: Sees the market. So I think once we get through this whole period, which hopefully knock wood will be at the end of Q3 that that will just go back to being a non cyclical asset going forward from here.
Mark: Mark is a little bit more capex, driven <unk>, a little bit more capex driven.
Speaker Change #109: I will say that mogg is likely to be less cyclical than it's been in the past because I think the management team.
Speaker Change #109: Has done a really good job opening up the vectors in terms of what we sell and there is an actually a pretty large installed spare parts business there.
Speaker Change #109: <unk> is always going to be cyclical, but that's not a tail that's going to wag. The dog is just not that big in our portfolio.
Speaker Change #121: Great Super helpful. Thank you.
Speaker Change #109: Yes.
Speaker Change #109: Well hear now from Mike Halloran with Baird.
Michael Patrick Halloran: Hey, good morning, everyone.
Mike: Hey, Mike.
Michael Patrick Halloran: One for me a quasi too part of those so if you think about the short cycle trends you talked about some choppiness in the order patterns through the quarter.
Speaker Change #138: Maybe just talk about how youre thinking about the short cycle trends and then secondarily. If there are any leading indicators in those.
Speaker Change #126: The end markets or product categories, where you're seeing signs of concern or inversely Conversely, excuse me signs of acceleration.
Michael Patrick Halloran: Thanks.
Speaker Change #119: That's Oh I don't want a march through the entire portfolio, it's just been choppy.
Speaker Change #119: All year and short cycle.
Speaker Change #122: Thank you.
Speaker Change #127: The distribution is still digesting higher interest costs.
Speaker Change #122: The GDP print today was good at least for North America has not been great at a Europe for a period of time so.
Speaker Change #161: So there's a lot of uncertainty of kind of what the catalyst is for for demand.
Speaker Change #122: So I think I mentioned in my earlier comments like intra quarter volatility of order rates.
Speaker Change #122: We have like heart attacks around here week over week, because that kind of flexes all over the place, but when you let the tide go out.
Speaker Change #122: We're still growing the top line I think that the areas that we know that are in cyclical down trends, we've got a handle on that ice.
Speaker Change #122: Like to seed fueling do better I think that that's been a little bit slower than we would've expected.
Speaker Change #122: Through the first half we're going to keep a close eye on order rates there going into the second half and our expectation is because we've got easier comps in the second half that that by and large the hurdle rate for orders isn't herculean.
Speaker Change #119: Yeah.
Rich: Thanks Rich.
Michael Patrick Halloran: Thanks.
Michael Patrick Halloran: We will go now to Deane dray with RBC capital markets.
Deane Michael Dray: Thank you and good morning, everyone.
Michael Patrick Halloran: Dan how are you, Hey, Hey, rich I really like seeing this pivot into a higher up the technology curve. These critical components in there typically a lower cost.
Michael Patrick Halloran: Project.
Michael Patrick Halloran:
Speaker Change #131: And I know youre not going to reveal exactly the areas that youre move begin to you, but you did.
Speaker Change #155: Characterized ESG divestiture as pivoting away from capital goods and then Jos.
Speaker Change #130: You answered John's question, you gave some color there, but there are still lots of capital goods exposures in the portfolio, So where do you draw. The line what's the timing you've made lots of margin improvements you said that was kind of a gating factor, but where do you draw the line and how much change can be.
Speaker Change #134: The organization take at a given point in time.
Speaker Change #134: Theres nothing that we have to sell Deane and we didn't have to sell ESG either right I mean, if I go and look.
Speaker Change #141: On return on invested capital and ESG.
Speaker Change #123: It's been great right because the earnings.
Speaker Change #129: The earnings improvement has been terrific.
Speaker Change #123: It's an older asset so you've got to always be careful with ROIC, because it's asset base has been depreciated over a long period of time. So it gets a little flatter there, but I don't want to repeat myself, but we you know.
Speaker Change #123: We spend an inordinate amount of time here doing our own sum of parts on every piece of this portfolio.
Speaker Change #123: So we've got <unk>.
Speaker Change #123: Clear understanding at what hurdle rates are for monetization.
Speaker Change #123: But we're not going to and window dress the portfolio and sell things at below intrinsic value.
Speaker Change #123: Just to make the gross margin go up by 50 basis points. So I can't tell you about the timing.
Speaker Change #123: Well just going to have to be patient and we see where it goes in there I think that the important issue to understand it.
Speaker Change #123: Is that we've got optionality in terms of firepower that a lot of people don't have meaning that we can lever up on an M&A front and then delever by monetization that's not what we did here I think we were just more opportunistic but that is something that it's an arrow in our quiver going forward.
Speaker Change #140: That's really helpful.
Speaker Change #140: Thank you for that context, and then just question for Brad.
Brad: Expectation of working capital improvements in the second half.
Brad: Can you give us some.
Brad: Color, there or any specifics and then what about.
Brad: What should we be thinking about buybacks for the second half.
Brad: Well I think Richard to take the second question part of that question first.
Speaker Change #139: I think rich already answered that in a sense that our priority is around capital deployment to M&A, especially as we move here into the second half with market conditions of available assets that we see so I think that's a positive thing for us as we move through the year.
Speaker Change #149: In terms of.
Speaker Change #144: The trajectory on working capital and cash flow I mean, really it's no different than last year. When you think about it I mean, we're on pace.
Speaker Change #144: With the prior year, we have good line of sight in terms of what we need to do in the back half around inventory and receivables and it's all highly achievable.
Speaker Change #139: And the same pattern that we saw last year. So we have pretty good confidence we have confidence in the 13% to 15 at this stage.
Speaker Change #133: Thank you.
Speaker Change #133: Thanks.
Speaker Change #133: And we'll take our final question today from Nigel Coe with Wolfe Research.
Nigel Edward Coe: Hey, Thanks, Thanks, guys good morning.
Speaker Change #143: Yeah look I know theres been other questions on the cryogenic you know kind of strategy.
Nigel Edward Coe: But the market itself you deal looks really interesting and you'd be the 10 points of synergies that you called out kind of caught my attention.
Speaker Change #146: Maybe just remind us what sort of growth do you expect the market to.
Speaker Change #136: Two kind of compounded for the next three to five years.
Speaker Change #142: With this cluster of businesses do you think you can gain share and outgrow that market and maybe just a I don't know if you can tell us this but what is the entry margin for the module deal.
Speaker Change #135: Okay, well I don't have to remind you about the growth rate because I don't think we ever gave you one.
Brad: Okay.
Speaker Change #145: I look we're going to give you like have you may have missed at the beginning I think.
Speaker Change #148: Because we built this platform our intention is to re segment it into its own platform and when we do that we're going to give you a big presentation of long term growth outlook and everything else.
Speaker Change #162: Tell you that the profile of what we've been buying has been around 20% margin and I think then between synergy value and accelerated growth. We think within 24 month period, we can get into 25% EBITDA margin. So that's kind of the economics behind it.
Speaker Change #148: Uh huh.
Speaker Change #153: Yes, sorry, I missed the first part of the call so I missed that.
Speaker Change #145: Yeah.
Speaker Change #154: And the 10 points would that be primarily Costa was excuse me costs. Those are some readiness engine as well.
Speaker Change #152: No revenue synergy, it's all we know you've seen us make the presentations before about back office consolidation and all those things that we haven't got a whole system.
Speaker Change #152: It's an in place in this particular case, we actually think we've got some backward integration footprint opportunity here from our legacy businesses. So those are really the two big pieces okay.
Speaker Change #152: Okay. Thanks, Rich and then just for Brett.
Speaker Change #147: Just some details on the ESG you said that the discontinuation is that on a go forward basis. So that'd be a second half impact or do you have to go back and discontinued for the fifth of as well and then is it do you have any sense yet on the tax leakage on the deal.
Speaker Change #159: Yeah. So.
Speaker Change #151: As it relates to discontinued ops it would be all prior periods presented okay. So we will restate everything.
Speaker Change #147: Once we get to a point in time here later in the third quarter, we will.
Speaker Change #147: We'll be taking a hard look at that and they probably dropped at that point in time and Youll see all the restatements filed in advance. So we have that data in advance and then tax leakage you should just assume a normalized U S type of tax rate, 21% or so of the leakage.
Speaker Change #147: Okay.
Brad: Great.
Brad: It's very possible that that cash taxes. Unlike to stake goes out this year. So we're looking at that timing as well.
Speaker Change #156: Okay, but that wouldn't be in your guide right. So the free cash flow that that'd be.
Speaker Change #157: Right right.
Brad: Well handled the same way we handled the stay go by adjusting free cash flow.
Speaker Change #158: Great Okay. Thanks for that.
Brad: Yes.
Speaker Change #150: Thank you everyone that concludes our question and answer period and Dover's second quarter 2024 earnings Conference call. You May now disconnect. Your line at this time and everyone have a wonderful day.
Brad: Okay.
Brad: Okay.
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Speaker Change #160: Uh huh.
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Brad: Oh.
Brad: Yeah.
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