ReShape Lifesciences Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 27, 2022

There are 14 speakers on the call.

Operator

Good morning, and welcome to Dover's 4th Quarter and Full Year 2021 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Officer Brad Serapak, Senior Vice President and Chief Financial Officer and Andre Galuk, Vice President of Corporate Development and Investor Relations. Executive. As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call.

Operator

If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Andre Galuk. Please go ahead, sir.

Speaker 1

Thank you, Tani. Good morning, everyone, and thank you for joining our call. Officer. This call will be available on our website for playback through February 17, and the audio portion will be archived for 3 months.

Speaker 2

Officer, which are available on

Speaker 1

our website. Our comments today will include forward looking statements that are subject to uncertainties and risks. We caution everyone to be guided in their analysis of Dover by referring to our Form 10 ks and our most recent Form 10 Q for a list of factors that could cause our results to differ from those Officer. With that, I will turn this

Speaker 3

call over to Rich. Thank you, Andre, and good morning, everyone. Let's start on Page 3. We are thankful for the extraordinary efforts of our Dover team members, which enabled us to deliver strong operating results amidst challenging conditions of the company during 2021. We are also grateful to our customers who trusted us with their business while adapting their supply chains The durability of our customer relationships were the key elements of our success this year, and we are committed to build upon those pillars in 20 of 'twenty two and mobilized to deliver another strong year of performance.

Speaker 2

All right, let's go on

Speaker 3

to the quarterly and full year results. We delivered of strong and better than expected results in 4th quarter and the full year, posting organic revenue growth of 11% and 15%, respectively. Our margin conversion for the year was strong, and we delivered segment margin increase of over 200 basis points for the year, driven by volume growth, Productivity Gains and our center led enterprise capabilities. We are satisfied with this accomplishment in the face Officer of the well chronicled input shortages, supply chain constraints and COVID driven quarantines and absenteeism that became increasingly challenging during the Omicron period of Q4. As we mentioned in the opening remarks, we battled through as best we could under the circumstances, but we cannot help but be very frustrated By the continuing guidance on mandates and deadlines, it often it seems often that we have learned very little in the past 24 months.

Speaker 3

We complemented our strong operational execution with value creating organic and inorganic growth investments. We deployed $1,100,000,000 in 9 highly strategic bolt on acquisitions and also of our non core foodservice equipment platform on December 1. These investments advance our deliberate strategy to of Finance and the recent changes to our portfolio and to better reflect the nature of the markets and customers served by our businesses Officer. As well as the contributions to revenue, growth and profits, we have changed the name of our Fueling Solutions segment to Clean Energy and Fueling and our Refrigeration and Food Equipment segment to Climate and Sustainability Technologies. Officer.

Speaker 3

Looking ahead to 2022, we enter the year with constructive optimism despite the ever evolving operating environment and geopolitical clouds. We believe that growth conditions are still with us, but it is critical that policies are enacted or not enacted to continue this trajectory. A methodical monetary tightening is deemed necessary, and I agree that it is. I would urge caution on the pace of any policy decisions As COVID and its effects subside, we desperately need policy pragmatism with a bias towards policy that foster economic growth. Demand conditions across the majority of the portfolio remain favorable as evidenced by our strong sustained bookings in the Q4 and throughout the year with a book to bill each quarter above 1 even with the aforementioned double digit revenue growth.

Speaker 3

Our backlog of $3,200,000,000 is up 84% versus this time last year, which allows us to better plan our capacity, production and inventory, a major benefit in today's constrained operating environment. While we expect these operational challenges and supply chain and labor availability to continue into early 2022, We do not expect operating conditions and price material spreads to improve as the year progresses. Officer. We believe we are well positioned to deliver robust top line growth, margin expansion and EPS accretion in 2022. We are therefore forecasting full year revenue guidance of 7% to 9% organic growth and adjusted EPS of $8.45 to $8.65 per share.

Speaker 3

Officer. I will skip Slide 4, which provides more detailed overview of the results. So let's go on to Slide 5. Engineered Products revenue was up 16% organically in the quarter as demand remained favorable across all businesses. Vehicle Services posted a strong top line quarter and market indicators remain positive.

Speaker 3

Environmental Services Group revenue was up year over year with both bookings and backlog remain robust moving of 2022. Industrial Automation demand remained high, posting its strongest bookings quarter of the year, with good momentum behind our recent SB acquisition, the recovery of industrial, which continues with all end markets trending positive. Despite the heightened demand, margin performance in the segment remains negatively impacted by the combination of input cost inflation Executive Officer and input shortages with notable impact from COVID related absenteeism, particularly late in the quarter where we ran at over 20% rates Officer, in some instances, at the height of Omicron. In the Q4, Engineered Products was the only segment that had a negative price cost spread, Officer, largely driven by raw materials and logistics costs. This remains our most challenged segment in the current operating environment that Officer.

Speaker 3

We have line of sight to improve margin outlook as the price cost spread turns positive in 2022. Incremental margin conversion is expected to gain steam through the year as we We'll cycle through inventory and we'll begin shipping off a strong backlog that was priced in the second half of twenty twenty one. Clean energy and fueling was down 4 and Company. We are confident that we will be able

Speaker 2

to deliver a significant amount of inventory in the quarter against

Speaker 3

the difficult comparable from 2020 when we saw the high watermark of EMV demand. Additionally, volume was constrained by our customers' construction, Labor slowdown and component shortages as well as COVID absenteeism in Europe. Booking trends and backlog in the aboveground business remain constructive. Based on early market feedback and trajectory, we believe that we have a winning product with the Anthem dispenser. Officer.

Speaker 3

Conversely, demand trends for belowground equipment have picked up in North America and deliveries in vehicle wash continued their upward trend, most notably Executive Officer and Access Terminal and Controller Business that we acquired a year ago. Our recent clean energy acquisitions had a minimal impact on our Q4 results. However, backlogs Executive Officer. Margins were down in the quarter primarily due to the lower volumes, product mix, of Absenteeism Driven Inefficiencies and Loss Fixed Cost Absorption. Full year results in this business were Strong and better than we initially forecasted early in the year on robust growth, productivity and favorable mix.

Speaker 3

Sales in imaging and identification The core marketing and coating business was strong in comparable volume, though a shortage of components and some order push outs of reduced volumes and printers. Our serialization and brand management software business continues to grow ahead of expectations, and we are working diligently The recovery was up against a low bar comparable quarter, but it has still not recovered to pre COVID levels. Q4 margins in Imaging and ID improved by 40 basis of the company's business. We have a strong quarter at 30% organic growth and 170 basis points of margin expansion on good volumes and productivity initiatives. Pumps and Process Solutions posted another strong quarter at 30% organic growth.

Speaker 3

Revenue for our CPC business was up double digits. We completed a clean room expansion project for this business in December in anticipation of another strong growth year in 2022. Industrial and Biopharma pumps were up on broad based end customer demand across all geographies. Officer. We are pleased with the performance of the flow meter business within Emtek, which we acquired in 2020.

Speaker 3

Its biopharma sales have doubled in 2020 Precision Components was up as the business continues its recovery on improving demand in their broader industry exposure. Polymer processing was up in the quarter due to strong demand for pelletizers and gear pumps as well as strong order rates in recycling equipment Executives, particularly in the U. S. And China. Margins expanded by a robust 7.40 basis points in the quarter and of 790 basis points in the year on strong volumes, fixed cost absorption, favorable product mix and pricing.

Speaker 3

Top line results in Climate and Sustainability Technologies continued to be robust, posting 13% organic growth. SWEP, our heat exchanger business capped off the year posting all time records in bookings revenue and margin and carries a strong backlog into of 2022. The business was strong across all geographies and end markets with particularly favorable demand in EMEA

Speaker 2

Executive Officer for heat pumps driven

Speaker 3

by regulatory requirements. We have been adding additional capacity in several geographies to meet forecasted future demand. Belvac, our provider of production solutions for beverage packaging, posted a revenue decline in the 4th quarter on difficult comparable, Driven by project timing. As you know, this business is up significantly in 2021, part of a multiyear secular Demand in our food retail business remains robust with elevated bookings and backlog levels. Our systems business in the U.

Speaker 3

S. And Europe continued its robust growth Executive Officer and Deliveries and orders for natural CO2 refrigeration systems. Demand for door cases remained elevated as well. However, we continue to face labor constraints And subcomponent supply shortages that delayed shipments, which necessitated intermittent production curtailments negatively impacting margins. Officer.

Speaker 3

We've instituted a number of price increases, which we expect to positively contribute to margins and conversion into 2022. Margins were flat, largely flat as the quarter as excellent operating performance in Swept offset refrigeration headwinds despite the smaller revenue base. This segment demonstrated good progress in 2021, 22 percent organic growth after a very modest 3% decline in 2020 and 230 basis point margin expansion despite multiple operational challenges as the year presented. With a strong backlog, we expect

Speaker 4

Officer. Let's go to Slide 6. On the top is the revenue bridge. Our top line organic revenue increased by 11% in the quarter with all segments except of Clean Energy and Fueling Posting Growth. FX was a 1% or $12,000,000 headwind to the top line.

Speaker 4

M and A added $17,000,000 net Officer. We are pleased to report that to the top line in the quarter, a product of $26,000,000 from acquisitions, partially offset by $9,000,000 from the Unified Brands of Divestiture. The revenue breakdown by geography reflects strong growth in North America and Asia and solid growth across of Europe and the Rest of the World. The U. S, our largest market, posted 16% organic growth in the quarter All of Asia was up 15% organically on growth in biopharma and industrial pumps, marketing and coating and heat exchangers.

Speaker 4

Of China, which represents approximately half of our business in Asia, was up 17% organically in the quarter. Officer. Europe grew by 7% in the quarter on strong shipments in precision components, biopharma and industrial pumps, natural refrigerant systems Moving to the bottom of the page. Bookings were up 22% organically in the quarter, reflecting continued broad based momentum across the portfolio. Bookings helped drive our consolidated backlog to $3,200,000,000 up 15% sequentially, inclusive of backlogs from our recent acquisitions.

Speaker 4

In the quarter, we saw organic growth across 4 of the 5 segments. Let's go to the earning bridges on Slide 7. On the top chart, adjusted segment EBIT was up $47,000,000 and adjusted EBIT margin improved 60 basis points as improved volumes, continued productivity initiatives Adjusted net earnings improved by $34,000,000 as higher segment EBIT more than offset higher corporate expenses and higher taxes. Officer. Deal expenses primarily related to our clean energy acquisitions were $11,000,000 in the quarter, representing approximately $0.06 of Adjusted EPS Headwind.

Speaker 4

The effective tax rate, excluding discrete tax benefits and gains on the sale of businesses, was approximately 21.7 percent for the quarter compared to 21.1% in the prior year. Discrete tax benefits were 10.3 of $1,000,000 for the quarter or $2,100,000 higher than 2020 for approximately $0.01 Executive Year over year EPS impact. After tax rightsizing and other costs were $22,000,000 in the quarter, reflective of our ongoing Productivity and Rightsizing Initiatives, including non cash asset charges of approximately $16,000,000 Now on Slide 8. In 2021, we generated $944,000,000 of free cash flow, a slight increase over the prior year. Free cash flow conversion stands at 12% of revenue for the year despite an over $300,000,000 investment in working capital.

Speaker 4

As we discussed last quarter, we remain focused on delivering against our customers' strong order rates, and we are carrying high inventory levels to ensure we can meet Executive Officer. With that, I'm going to pass it back to Rich.

Speaker 3

Okay. Thanks, Brad. I'm on Slide 9, which shows our progress in 2021 against Capital Allocation Priorities we outlined at our Investor Day in 2019. We have a strong collection of businesses and our first and Chief Executive. Our priority is ensuring we can

Speaker 2

continue to win in the market

Speaker 3

through organic investments supporting growth capacity, digitization, innovation and productivity. We deployed over $170,000,000 in capital expenditure in 2021 towards growth and productivity enhancements as well as maintenance of our Officer. Notably, we invested over $14,000,000 in digital products and digital and e commerce, which allowed us to reach our goal of over $1,000,000,000 in e of revenue last year with no touch by customer service. This represents over 10 times the volume we processed of the company's business in 2018, and our 2020 goal is to double our 2021 volume. Our next priority is inorganic growth.

Speaker 3

Last year, we deployed $1,100,000,000 into 9 highly synergistic bolt on acquisitions, including 2 larger deals, Acme and Regal, Officer, which we closed in December. All these acquisitions enhance our portfolio by increasing our exposure to markets with structural demand growth outlook. Our pipeline and acquisition capacity remains strong, and we expect to remain active on this front in 2022. Our third priority is to return capital to our shareholders. We again raised our dividend in 2021 as we have done for the past 66 years.

Speaker 3

Let's move to Slide 10. We provide more color on some of our organic investments. I won't go into specifics on any of these projects individually, but You'll see that our investments are substantial in size and represent a broad variety of productivity improvement and digitization initiatives as well

Speaker 2

and our investments in

Speaker 3

capacity expansion and new product development projects. These investments provide compelling financial Officer, our proactive capacity expansions have allowed us to win share in that tight supply market. Slide 11 includes our current view of the demand outlook and operational environment for 2022 by segment and how margin drivers are expected to trend over time and and provides context of how we are thinking about our full year guidance, which I'll get to shortly. We expect top line and engineered products to remain robust Officer, based on solid backlog and sustained high bookings across the business. All market indicators and vehicle aftermarket continue to remain positive with miles driven Having fully recovered to pre pandemic levels and used car prices remaining elevated.

Speaker 3

Orders for refuse trucks and software solutions are robust, Officer with new order rates pushing well into the second half of twenty twenty two. Momentum in industrial automation and industrial winches should continue on the back Officer of the business. Solid bookings quarter with all end markets contributing to growth. Aerospace and Defense is expecting growth and positive order trends, largely driven by Europe. We expect headwinds from negative costs to continue in the first half of the year, getting sequentially better as the year progresses.

Speaker 3

We expect this segment to be the only one with negative price cost spread in the Q1. Input availability, mostly labor absenteeism The recent omicron surge is expected to negatively impact production efficiency in the Q1, but should subside for the balance of the year. All in, we expect margins for the segment in the first half of the year to largely mirror the second half of twenty twenty, then to improve meaningfully

Speaker 2

and Chief Executive Officer for the full year

Speaker 3

driven by volume leverage and pricing. We expect clean energy and fueling to post low single digit organic growth Officer for the full year on solid growth in below ground, vehicle wash and software solutions, demand outlook Officer and bookings of our recently acquired Clean Energy businesses are very robust, and they are off to a good start. As you know, we don't adjust acquisition related amortization and Chief Executive Officer. And out of our adjusted segment earnings margins due to sizable acquisition related amortization charges from our recent deals in this segment, the operating margin Executive Officer, will be compressed in the Q1 of 2022. Excluding about $40,000,000 of incremental deal related amortization of expenses in 2022.

Speaker 3

We expect full year margin conversion to be in line with the broader portfolio. Demand conditions in imaging and identification are expected to continue the positive trajectory into 2022. Our core Marketing and Coatings business is expected of the company. We are now working on the progress we made in the segment to continue to improve in 2022. Pumps and Process Solutions should see another year of solid performance.

Speaker 3

Demand for biopharma applications remains robust, driven by demand for COVID vaccines as well as growth in Executive. We have expanded expansions in automation to ensure we can keep up with demand, and we have broken ground on the construction of a new facility. Additionally, our connector business is experiencing robust growth in new thermal applications such as data center and supercomputing and EV charging. Trading conditions in industrial pumps are strong, driven by robust end customer demand. Plastics and Polymers equipment business carries A solid backlog into 2020 with good market conditions and good quality, especially in China, the U.

Speaker 3

S. And Recycling Solutions. Precision Components continues its upward trajectory aided by OEM new builds and increasing activities at refineries and petrochemical plants. Officer. We expect margin performance to remain robust for the segment on volume growth, operational execution and positive price cost dynamics.

Speaker 3

In Climate and Sustainability Technologies, we expect to post high single digit organic growth this year driven by its large backlog Executive Officer and sustained elevated order rates. New orders in core food retail business have been healthy across product segments Executive Officer and the tailwinds from our leadership position in natural refrigerants are driving outsized growth of our CO2 systems business. As Omicron induced labor shortages abate in the Q1, we expect volumes of door cases to recover with backlog stretching well into the second half of the Year. Our heat exchanger business is positioned well on strong order rates across all geographies. The Belvac Packaging business continues to work through its record backlog.

Speaker 3

They are booked for 2022 and are taking orders for 2023. And Chief Executive. We expect margins to improve significantly in 2022 as improved volume leverage, positive price cost dynamics, Productivity gains from our automation initiatives and positive product and business mix should more than offset any lingering operational Executive Officer. All right. So before wrapping up and moving to Q and A, let's try to square At the opening of this call, I said our results were better than expected.

Speaker 3

That was not a reference to external consensus estimates,

Speaker 2

Officer and Productivity losses, which were

Speaker 3

not in our base forecast, we would have shipped more product in Q4, resulting in higher sales and cash Executive Officer of the company's business, but

Speaker 2

lower consolidated margin on product mix.

Speaker 3

As a result of this, while we do get the benefit of carrying higher backlogs into 2022, Officer. We have not cleared as much higher cost inventory and have not realized all the benefits of past pricing actions embedded in that backlog. This will result in the calendar digitization of absolute earnings and earnings growth and especially segment operating margin being more back end loaded Executive Officer and a typical year as a result of this delayed backlog clearance. A few implications of this dynamic. Number 1, we have prudent operating margin Executive Officer.

Speaker 3

We expect our expectations for Q1 and encourage those modeling quarterly forecasts to exercise the same level of prudence. Number 2, it is a good sign of backlogs gradually deplete during

Speaker 2

of the year as it will be driven by

Speaker 3

higher production performance as labor availability and supply chains improve. And lastly, if both these dynamics play out as forecasted, We can expect inventory levels to drop, supporting increased operating cash flow in 2022. Officer. So let's move to Slide 13, which hopefully removes the quarterly noise and gives us some view of post pandemic full year performance. Here we provide a bridge between our adjusted EPS in 20212022.

Speaker 3

We expect to generate double We have a strong year of positive EPS growth again this year driven by solid organic top line growth, much of which is currently in backlog Executive Officer, as well as healthy full year margin conversion and the positive impact from acquisition close in 2021. And so let's wrap up on Slide 14 to put our results and guide into a longer term perspective. Our strategy has driven of significant value creation for our shareholders over the last several years as evidenced by the total shareholder return driven by Underappreciated top line growth, cumulative margin expansion of 4.40 basis points, healthy cash flow generation Executive and Capital Redeployment. We believe that our playbook offers us significant runway to continue delivering attractive Executive Officer. And with that, let us move to the Q and A.

Speaker 3

Andre?

Operator

We'll go first to Scott Davis with Melius Research. Your line is open.

Speaker 5

Hey, good morning, everybody.

Speaker 3

Hi, Scott. Hi, Scott.

Speaker 5

There was a lot of detail in there. I'd be lying if I said I followed every single word. But Maybe we can start with just a little bit more color. It seems like this absenteeism and cost issues kind of lingering Is it getting are things getting any better? Are they just as bad now as they were kind of in 4Q?

Speaker 3

Well, I guess now that we've disposed with the federal mandate, hopefully, I mean that was not helpful It is getting better. I think that the quarantine period being halved has helped. So it's not as bad as the peak, which is probably in December, but it is lingering somewhat into January, but it's not as bad.

Speaker 5

This cash flow guide is pretty solid. Does that imply there's Some work down in working capital or are you at working capital levels that are kind of more I would say new normal given the supply chain messes out there or You have some flush out in 2022.

Speaker 3

Yes. I mean, look, we expected to Now whether we would have been caught up in receivables, who's to say? My view is We would have expected to maybe have a slight increase in inventory based on the revenue, But our expectation for 2022, if we get this right, which I expect we will, is that we're going to give back that build Net of revenue increase for the year. So I expect to do better in working capital In 2022 than we did in 2021.

Speaker 4

Yes. I would just add, I think we have a modest forecast of inventory drawdown. Depending on how the year progresses, there could be some incremental there.

Speaker 5

Good luck, guys. Thank you.

Speaker 2

Officer. Thanks.

Operator

We'll go now to Steve Tusa with JPMorgan. Your line is open.

Speaker 6

Something like that or soft actually not now because the growth is now selling off. So maybe something different. The change in the name is interesting though. Does that mean you're keeping refrigeration?

Speaker 3

It's in our forecast for 2022.

Speaker 6

Look, at

Speaker 2

the end of

Speaker 3

the day is we can't call it food equipment anymore since we disposed to the food equipment business. So by and large, we had to rename it. The fact of the matter is, and I don't want to get cheeky about ESG driven nomenclature here, Officer. Yes, that the fastest growing portions of that segment are in Sustainability Technologies. It's Swept and our CO2 systems and Belvac, which are all driven,

Speaker 7

we would argue, by

Speaker 3

Officer. I get it. It looks a little bit cheeky on our part, but it is what's growing within the portfolio.

Speaker 6

Yes. Officer. And then, you mentioned, I think asking us to use prudence in our modeling is a lot, to ask, I think. Can Can you be a little more specific about kind of like 1st quarter, maybe even 2nd quarter kind of dynamics on sales and margins?

Speaker 3

Yes. I think that, that first quarter will look more or less like Q4. I think they'll move around a little bit segment by segment. And I would imagine a little bit better But at the end of the day, some of the headwinds we had in Q4, we're going to carry into Q1. A lot of that driven by, as Scott asked, The lingering effects of absenteeism, which we're still dealing with a little bit right now.

Speaker 3

Logistics costs haven't come down a lot. What we would have expected to be catching up on price cost dynamic is a bit delayed. But that's all incorporated into our the full year number.

Speaker 6

Yes. And what you mean by that is on an absolute basis,

Speaker 2

is that what you're talking about? Yes. Yes. Yes.

Speaker 3

Yes. On an absolute basis.

Speaker 6

Okay, great. Thanks a lot.

Speaker 3

All right. Thanks.

Operator

The next question comes from Jeff Sprague with Vertical Research. Your line is open.

Speaker 7

Hey, thanks. Good morning. Good morning.

Speaker 8

Just back

Speaker 7

on the clean new CleanTech segment, whether or not refrigeration stage ago, I wouldn't expect you to address Today, Rich, necessarily. But do you actually see scope to do some additions in that area? You have legitimately transformed the fueling segment, Right, with some interesting deals. Are there kind of logical extensions to SWEP or Belvac or Other things that are adjacent to those businesses that would be in your M and A pipeline?

Speaker 3

There are, but The beauty of those two businesses is the fact that they're so concentrated in terms of the supply base. So there's not a lot of M and A you can really do. But if you look where we've been spending organic capital, We've actually been deploying proportionally quite a bit to Swept and Delfack on organic capacity expansion. So I'm not ruling M and A out because there are some interesting adjacencies around it. But What we've been doing is just investing behind growth and I think that Swept will be finishing in 2022 Executive Officer.

Speaker 3

Expansion in all four of the geographies they can they participate in, for example. And I think that we've put in 15 years worth of CapEx into Belvac over the last 18 months or so. So, it's more of organic play, I think.

Speaker 7

Okay. And just on the pumps business, I mean, the results really are quite remarkable. To what extent would you say there's, I don't know, temporary COVID benefits running through biopharma? Or do you just see And other things driving that business. I guess the question is really just around the sustainability of these growth rates.

Speaker 3

Yes. Well, the growth rates are going to come I mean, let's call a spade a spade here. I mean, I think it clocked in for, what, 30% for the year, something like that. So they're going to come down over time, and we don't have that kind of growth rate in that business embedded into our forecast Executive Officer. We also do not forecast any margin dilution because of COVID demand roll off because we think That the fundamental demand for those products is solid, and I would have hoped that maybe Danaher could have The growth rate will come down as COVID demand begins to roll off.

Speaker 3

We don't envision it going negative in 2022 nor do we think That margins are going to be negatively impacted.

Speaker 7

And maybe just last one, just back on price cost. So It sounds like the entire company should be price cost positive in Q2. Is that correct? And When you're talking about price cost, I guess, flipping into the positive, are we talking dollars, margins or both?

Speaker 3

The answer to the first question is yes for the entire company in Q2.

Speaker 7

Great. Thanks for the color.

Speaker 3

Thanks.

Operator

Our next question comes from Andrew Obin with Bank of America. Your line is open.

Speaker 8

Hi, yes. Good morning.

Speaker 3

Hi, Andrew.

Speaker 8

Hey, just a question. In terms of just focus on biopharma and just Just how much growth Can you drive organically by expanding biopharma capacity? And just thinking beyond COVID, do you think there is a real opportunity there?

Speaker 3

I hope so since we're greenfielding a new facility for it right Now as we speak. Yes, look, I mean, we were not able to keep up with customer demand in 'twenty one. I think that we did better than some of our competitors, meaning I think that we captured growth

Speaker 4

opportunities.

Speaker 3

But even with that capture, I think that we were at certain points of the year disappointing our customers with our ability to serve. So that was what drove the decision About expanding capacity and I think we greenfielded the facility up in Minneapolis in 2019. It's sold out. So that's why we're expanding there. And in our disposable pump business In Germany, we are bringing assembly operations with the expansion of clean room in the United States, for that particular product.

Speaker 3

And as we've discussed many times, look, it's no secret that These are really interesting pieces of the market, and they attract very high pricing. So we're going to have to be selective on the M and A side. I think we have some interesting things that we're looking at for sure, but I think that we can do this simultaneously inorganic and organic.

Speaker 8

Got you. And just a question on your business model. You're growing the e commerce sales, I think, over $1,000,000,000 Imagine you're getting some sales efficiencies. But just A, how far can you take this model? And B, is there a generally greater structural ability To go direct to customers versus through distribution post COVID?

Speaker 8

Thank you.

Speaker 3

Let me answer the second one Second question first because it's easier. No, I don't think there's an our plan here is not to go around distribution. Our plan here To put in e commerce platforms is

Speaker 2

a couple of

Speaker 3

things, right? I mean it's a cost savings issue, but I think Clearly, the real benefit of moving to e commerce platform is the S and OP process gets a lot slicker, Inventory management gets a lot better and you can centralize pricing rather than having distributed pricing around the world. So Yes, it's a bit of cost savings, but the real benefit is operational Over time, and it's not a kind of go to market platform, and we expect to continue to sell through distribution.

Speaker 8

Thank you.

Operator

The next question comes from Andy Kaplowitz with Citigroup. Your line is open.

Speaker 9

Good morning, everyone. Hi, Andy. Rich, maybe you can give us a little more color into your confidence level that margin can turn more positive in BP. Do you need your Productivity Projects in ESG and VSG to complete before you get the margin turn. And then the business obviously is steel heavy.

Speaker 9

We're still rolling a bit here. Does it give you more confidence in the turn and just a lag as some of the business is backlog driven?

Speaker 3

We were negative price cost Officer. In terms of the inventory turns, it's just more difficult, putting the labor issues aside. So on that alone, we've priced And what that does, all things being equal, is go back to historical The investments we're making are longer term investments that should be accretive Okay, some period of time. We're re outfitting both of the main plants for those businesses.

Speaker 9

Got it. And then I'm going to ask you the old bookings question in the sense that bookings did not slow as you thought. Officer. I think we all understand that bookings will slow, but do you see an environment at least right now where the high level of bookings you're seeing is relatively Executive. And how do we think about whether there is conservatism in your new 22 organic guide versus the backlog that's up obviously over 80%.

Speaker 3

Nothing like going first. I bet our revenue guide is not conservative when we're all said and done here, but I'll take your question anyway. I look, bookings are going to slow. I mean, we've got businesses that are relatively short cycle that are booking into Q3. I mean, it's just inexplicable to me that there's any even need for our customers to go beyond there Officer.

Speaker 3

I think we're going to get and it better happen because if it doesn't happen, that means that Supply chain issues are not resolving ourselves in 2022, and we expect that to get progressively better. So Strangely, it's going to be a good thing if bookings decline in 2022 relative to the rate that we saw in 2021.

Operator

We'll go now to Mig Dobre with Baird. Your line is open.

Speaker 10

Yes, thank you. Just sort of sticking with this Officer, I would imagine that EP is probably the area where you're seeing the biggest challenge, but I'm kind of I'm curious, 1, how that's changing and 2, some of the other segments that might be experiencing this as well.

Speaker 3

I don't think that there's any segment that's immune to it. It's just if you Complexity because just the size and the dimension of the product as opposed to something like a connector that's made out Executive Officer of injection molded plastic at the end of the day. That's more of a capacity constraint and maybe some logistics. So the locus of the issue on supply chain It's more applicable to what goes on in Engineered Products than anything else. So it's not as bad as it was.

Speaker 3

And it's getting better. We would have liked to see it get better in terms of If you look at our working capital number, we have built a bunch of inventory and the reason we built partially, the reason we built all that inventory is to get around the Intermittent curtailments of production, which really cost us a lot of money. So our goal here is we're assuming that Production curtailments are going to come down a lot versus 2021 2022 and then Logistics and Supply Chain will gradually get better through the year. Those are the underlying assumptions.

Speaker 10

Okay. But It sounds like you're seeing some of this already. It's not just aspirational, hoping for it. Some of this is getting a little bit better.

Speaker 3

I mean, we can look at the futures

Speaker 10

on raw materials and of Steel and Bar and everything else. Those are we can buy those inputs at lower prices than we have them in inventory right now. And related to that, my final question here. How do you think about pricing beyond 2022? Because obviously, Officer.

Speaker 10

You have raised prices because of raw material inflation. Does that imply that you're going to have to give pricing back in 2023 or not?

Speaker 3

That's a good question. And our expectation is we did not reprice our backlog

Speaker 6

All right.

Speaker 10

Thank you.

Speaker 2

You're welcome.

Operator

We'll go now to Julian Mitchell with Barclays. Your line is open.

Speaker 11

Hi, good morning. Officer. Maybe just wanted to circle back to the sort of incremental margins. You have that 30% or placeholder for the year. From a firm wide standpoint, it sounds like understandably that starts out the year at the lower end and then builds.

Speaker 11

But maybe looking at it from a segment Should we assume that the incremental margins by division sort of tally up

Speaker 3

Let me answer it the best I can. I think the businesses that had decremental margins In 'twenty one are where we expect proportionally the biggest recovery in 'twenty two. So when I think if you go back and look at the granularity of the comments that I That long winded explanation I gave at the beginning. So and then we don't expect for margins We don't give out growth rate by business and or segment. So you're going to have to make some assumptions there.

Speaker 3

But we give you backlog and everything else and we give you the full year. So I think it's safe to say We expect robust incremental margins where we suffered in 2021 and we expect

Speaker 4

The only thing I would add to that is that we've got to be a little bit Andre and Jack could help with this. There's a little bit of effort around the acquisitions impact on conversion. So when we give a range there, we think about that range pre those impacts that we disclosed in the The script we had, which was $40,000,000 for the year, depending on how you're doing your calculations that can impact conversion.

Speaker 3

Very good point.

Speaker 11

Thank you, Brad. And then maybe my second question, Just when we're looking at sort of pricing, you talked about pricing beyond 2022, but maybe stick with 2022 for now. I suppose it was a 2.5 or 3 point tailwind to revenue firm wide Last year, just wondered within that 8% organic sales growth midpoint guide for this year, Executive Officer. How much of that roughly is price and any big sort of first half, second half difference on that price tailwind?

Speaker 3

Yes. We had a long discussion here You're asking me to predict mix into the future. I think that we have it here at the end of the day. I just don't think it's meaningful in terms of But does it really make a difference if it's 2.25% or 1.5% at this juncture? I would argue not.

Speaker 3

And beyond 2023, I know that Mig asked the question about pricing in the future. We're not prepared to have that discussion yet.

Speaker 4

Yes. On the other hand too, our forecast does not assume that we need to get price in the back half of the year. I mean, we've been putting price in, As you know and as you track in the quarterly results that we put out, but we're not sitting here saying to hit this forecast, we need to have big price increases in the back half. That's not in the forecast. And I think that what that means is we'll be proactive on price when we need to.

Speaker 11

That's very helpful. Maybe tell us what was the price in maybe the Q4 then? Apologies if I missed that.

Speaker 3

Julian, I'm going to send you to the back office to go and deal with that. I mean, we're going to start carving this into pieces here.

Speaker 12

Fair enough. Thank you.

Speaker 3

Thanks.

Operator

Next question comes from Joe Ritchie with Goldman Sachs. Your line is

Speaker 12

open. Thanks. Good morning, everybody.

Speaker 5

Hey, Joe.

Speaker 12

So Rich, maybe I know you guys don't typically give margins by segment. You talked about the of Climate and Sustainability Technologies segment, seeing significant margin progress this year. Historically, you have had that kind of mid teens target out there for the retail part of your business. I'm just curious like any other color that you can kind of give us on How much progress you think you'll make in 2022? And then also just Unified Brands, Yes.

Speaker 12

Was that margin dilutive to your business? I know that came out that's coming out this year too.

Speaker 3

Officer. It was margin dilutive to the consolidated business. It was accretive to or would have been accretive to Q4, I I believe if it was still in, but small impact. Yes, small impact at the end of the day. Look, yes, we expect to hit our margin target for the Refrigeration business in 2022.

Speaker 3

That's embedded in the forecast. Executive Officer. And we've expanded we expect robust growth out of both Swept and Belvac in 2022, both of which All of that revenue is accretive to margins.

Speaker 12

That's great. Officer. So maybe just following on my following question, just staying in this segment. I mean, the backlog that you're building in segment is pretty incredible, right? You have $2,300,000,000 like I don't think anybody has got any forecast that are anywhere close That type of revenue number in the out years.

Speaker 12

I'm just like I'm trying to understand like how to think about this segment on a multiyear basis From a top line perspective based on what you're building today.

Speaker 3

Well, look, on the Refrigeration business, conceivably, we're going to get to the point where We'll cap off the growth in traditional door case and then put all of our muscle behind CO2. CO2 is the part that's inflecting right now. And we'll probably have more color on that once we get into the mid So we can just watch that as we progress through the year. And I think we'll do as we go through the year what we've done in the past and break Belvac backlog away from the segment so you can see And then in Swept, look, we've been doing very, very well in Europe on That's why we're expanding capacity today in advance of that. So to the extent that we're deploying the capital means that we expect that business

Operator

We will take our final question today from Brett Linzey with Mizuho. Your line is open.

Speaker 13

Good morning, all. Thank you.

Speaker 3

Good morning.

Speaker 13

Hey, just wanted to come back to the internal manufacturing inefficiencies that took place in 2021. Obviously, just given the environment those expected, but can you isolate those headwinds versus the raw mats and logistic inflation that you saw? I would imagine there's some non repeat there. Just trying to get a sense as to what that number looks like.

Speaker 3

Yes. It's a meaningful number. It's a large driver of the margin impact on Engineered Products and What was DRFE and I can't remember the name after all

Speaker 4

of this.

Speaker 3

And anyway, so but Sizing it, maybe we can get back to you. It's meaningful, right? And that's part and parcel to why Officer. We think that we can expand profits in an absolute basis in 2022 as much as we can because we took a lot of hits by It's absorption.

Speaker 4

Well, it's meaningful on the top line and on the earnings line. And I think Andre can work through that with you.

Speaker 13

Okay. Yes, great. No, I'm just trying to square the 30% incremental with price cost positive with these non repeat. So it seems like maybe some cushion in the guide. Just back to the e commerce, looking to double that, I missed the time frame you said in which you'd like to double those sales.

Speaker 13

And just given the lower cost to serve, what kind of incremental margin should we be thinking about as you take that number up?

Speaker 3

Officer. We are we did $1,000,000,000 in 2021. Our goal is to do $2,000,000,000 in 2022. And as I mentioned before, it's not really cost takeout. It's not the advantage here.

Speaker 3

The advantage is across the entire complex, Meaning inventory management, the ability to do pricing centrally, the ability to do dynamic pricing, SKU management. Officer. So you're just going to have to look at that as a portfolio move, and it's part and parcel to us Extracting synergy across the portfolio through those initiatives rather than trying to parse it by operating company or segment.

Operator

Thank you. That concludes our question and answer period and Dover's 4th quarter and full year 2021 earnings conference call.

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Earnings Conference Call
ReShape Lifesciences Q4 2021
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