The Dover Corporation held an earnings conference call for their second quarter of 2023, with Richard J. Tobin, Brad Cerepak, and Jack Dickens speaking. The conference call was recorded and will be available on their website for the next 90 days. Results were in line with internal forecasts, with certain businesses outperforming expectations. However, operational headwinds caused by an ERP implementation cost the company $50 million in revenue and $0.10 of EPS.

The business has done well in efficiency actions over the past 18 months and has narrowed its annual EPS guidance to $8.85 to $9. The company has proactively intervened on its cost structure to drive material earnings benefits and is less reliant on top line volume or price cost to achieve its forecast in the second half. Demand remains good and the company is confident in delivering its second half target, with a solid foundation building for 2024 from previously announced cost reduction actions.

In the quarter, consolidated organic revenue was down 3% despite growth in 3 of the 5 segments due to expected comparable volume declines and shipment disruptions in the vehicle market. Organic bookings were down 8%, resulting in a book-to-bill of 0.92. Segment margin was 20.2%, with margin performance preserved despite negative mix and lower volumes due to cost containment actions and lower input costs. Engineered Products was down 8% organically, and Clean energy and fueling declined 9% on an organic basis due to the final quarter of comps impacting the top line and margin mix.

Rich reported that organic revenue declined 3% in the quarter due to a decrease in Engineered Products and Clean Energy & Fueling. Acquisitions contributed 1% to the top line, while FX translation was a 1% headwind. Vehicle wash and clean energy saw a slight decrease due to inventory reductions, but margins were down 100 basis points due to lower volumes and mix. Imaging and ID was flat organically, with strong sales in software and serialization, while Pumps and Process was up 1% organically. Climate and Sustainability Technologies saw a 4% organic growth, with a strong 7% margin due to volume conversion productivity and positive price cost and mix of products delivered.

FX headwinds had a negative impact on EPS in the quarter and first half, but are expected to be an $0.08 tailwind in the second half. The U.S. was down 9% due to lower volumes in the aboveground retail fueling segment and lower shipments from vehicle services, while Europe was down 1% and Asia was up 2%, with China up 5%. Bookings were down due to normalizing lead times in shorter-cycle businesses and shipments against elevated backlogs in long-cycle and secular growth exposed businesses. Free cash flow was 8% of revenue, an increase of nearly $250 million year-over-year, and is expected to improve in the second half of the year. Margin outlook for 2023 is underpinned by current time log trends.

Fuel & Clean Energy is expected to return to growth in the second half of the year due to easier comparable periods and normalizing end market conditions and channel inventories. Engineered products are expected to return to growth in the second half of the year due to strength in refuse collection vehicles and aerospace and defense. The vehicle aftermarket shipments in North America are expected to recover after a temporary disruption in Q2. Imaging and ID is expected to continue stable performance against tougher comps in the second half. Software full year margins should remain attractive. The backlogs across all segments remain elevated, but should normalize by the end of the year.

In the second half of the year, pumps and process equipment is expected to remain roughly flat organically, while thermal connectors are continuing to grow at a double-digit clip. Precision Components is booking and shipping at robust levels, with the biopharma environment improving due to FDA approvals and recovery in biotech funding. Climate and Sustainability Technologies is expected to have steady top line growth, with heat exchanges close to capacity and CO2 refrigeration systems in demand. Beverage can-making is expected to be down due to recent capacity additions, but margins are expected to improve in 2023 due to volume conversion, productivity gains, and improved mix.

The company has taken proactive measures to reduce costs and maximize cash flow in order to offset the negative impact of interest costs on channel inventories. They have also invested in new product development to gain market share. They view 2023 as a transition year from a supply chain constrained environment to a more normalized activity, and they expect to see strong margin accretive recoveries in 2024.

Richard Tobin explains that the destocking process is not directly linked to bookings, and that the company has visibility that the process will be a one-quarter event and not cascade into Q3. They are confident in their ability to leverage a flexible operating model and centralized business systems to drive consolidated growth and margin accretion to achieve their full year guidance.

Richard Tobin explains that the bookings number is related to the reduction in the backlog, and that the cost of financing inventory in the channel has gone up exponentially. He believes that the majority of the reduction in cost to carry is behind them, and that bookings are likely to inflect positively in Q4. He also notes that the watch item from here is going to be bookings in biopharma, as their customers are beginning to call the bottom.

Richard Tobin discusses the various factors that will affect Dover's performance in the second half of the year, such as the reduction of inventory, destocking in the industrial pump side, and the deflating backlog from polymer processing. He also comments on the global supply chain being floated at no interest rate. Finally, he states that Dover has a strong foundation for 2024, and that there is a higher probability of achieving 4-6% growth and 30% incrementals in that year.

Richard Tobin explains that the company has experienced some negative headwinds due to a biopharma side and the EMV roll off, but they have managed to preserve the margin in that business. He expects a soft landing, and is optimistic that investments they have made in growth platforms will help them reach their financial objectives. He also mentions that Belvac, which had been doing well, is now seeing a debooking in door cases, which they expect to continue into the second half.

In Belvac, the top line is expected to decline, but the margin preservation opportunity is solid. In Refrigeration, June saw the highest margin performance ever, and the NAFTA CO2 is expected to be accretive to margins. The company is increasing its capacity by 40-50% by mid-2024, which should help offset any cyclical decline in Belvac.

Richard Tobin explains that the ERP issue this quarter was due to his mistake in trying to change too much at once. He put a lot of CapEx into the main plant in Madison, Indiana and tried to implement an ERP system while also harmonizing SKUs. This caused issues with production during the entire quarter, but it is expected to not be a material headwind in the future. The ERP system is necessary for the e-commerce changes they plan to make, but it caused disruption in the plant.

Richard Tobin explains that biopharma is the swing factor in the margin profile of the business, and that they are prepared operationally for when the pivot comes. He also notes that industrial pumps were down due to destocking, but that polymer processing and precision components have been doing well and offsetting the negative headwinds in biopharma. He states that if those two businesses grow faster than expected, the consolidated margin comes down, but the absolute profit performance is still acceptable.

Jeffrey Sprague and Richard Tobin discuss the margin progression in the second half of the year. In DEP, the margin decline in Q2 is due to the decrease in VSG volume. However, the capacity ramp and ESG will have a positive impact on the top line. In DPPS, the forecast shows a negative headwind for Q3 due to biopharma, but the headwind should roll off by Q4. The price benefit is less in the back half of the year and the cost is based on current tracking.

Richard Tobin explains that while Q4 is expected to be higher than expected, Q3 will likely be more or less in line. He cautions that Q3 could be negatively impacted by a decrease in margin contribution from the biopharma sector, but that margin improvement is expected for the full year. He also notes that the company needs to do roughly $4.5-$4.6 billion in the second half to get a 9% sequential increase.

Richard Tobin explains that they don't need the bookings number to improve much because they have a mix of businesses within their segments and have already enacted more than half of the required cost savings and EPS conversion. He also acknowledges that the macroeconomic environment is unpredictable but their actions have put them in a confident position for the back half of the year.

Charles Tusa and Richard Tobin discuss whether bookings have bottomed out, and the complexity of the portfolio with its nine different businesses. Tobin explains that the bookings in some of the businesses may appear low due to capacity reservation, while the short-cycle side is likely bottoming out. Tusa expresses his dislike of having to go through the details of the smaller businesses, suggesting that he and Tobin may be the only ones who are less than enthusiastic about it.

Richard Tobin and Charles Tusa have a discussion about the complexity of the portfolio and its potential to outperform in 2024. Richard suggests that the diversity of the portfolio could be an advantage, while Charles challenges him to grow double-digit earnings in 2024. The discussion then shifts to the short cycle side of things, with Michael Halloran asking for clarification.

Richard Tobin explains that the end market demand has been good overall, but distributors are trying to maximize cash flow due to the cost of carrying it. The imaging side is a bit more sluggish due to poor demand in China.

Richard Tobin does not want to be negative about third quarter sales, expecting them to be better than the last few quarters. However, fourth quarter sales are expected to be even better, as orders and production performance will be dependent on order rates between the two quarters and whether they need to start building for volume in the fourth quarter for the following year. Capital deployment has not been much of a factor.

Richard Tobin discussed the company's CapEx and M&A plans, noting that competition is less and that PE is stopped out. He mentioned that the company deployed $0.5 billion in an ASR in September of last year and that they will decide what to do at the upcoming Board meeting. Brad Cerepak noted that the company is not including a recouping of the $50 million that was disrupted this quarter and did not mention if any orders were lost.

Richard Tobin and Brad Cerepak discuss the potential to lose out on a $50 million order, and Brad clarifies that the team will do their best to recoup some of the order but that it is likely they will not be able to recover all of it. Brad then explains that the second half inventory draw down is mainly driven by safety stock levels and buffer inventory, with production exceeding inflows. Nigel Coe then suggests that some of the CapEx businesses may be trending weaker.

Richard Tobin discusses the cyclical nature of Belvac's can-making business and the expectation of some roll down. He also mentions the Refrigeration side, which experienced a customer-specific order cancellation, but the demand for the product is decent and conversations about 2024 are good. Additionally, Belvac is growing at a rapid pace in North America off a low base. Lastly, there are restructuring actions in place to focus on retail fielding.

Richard Tobin explains that they have individual strategies for each business in the portfolio. They are repositioning the business to become more lean and upgrade the entire product line globally. Their goal is to get the segment to 25% and they are seeing the building blocks of this working their way there. The conference call has now concluded.

This summary was generated with AI and may contain some inaccuracies.