Dover Q4 2024 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
February 1, 2024
Skip to Questions & Answers
Operator

Good morning, and welcome to Dover's Fourth Quarter and Full-Year 2023 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer; Brad Cerepak, Senior Vice President and Chief Financial Officer; and Jack Dickens, Senior Director, Investor Relations. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you.

I would now like to turn the call over to Mr. Jack Dickens. Please go ahead, sir.

Jack Dickens
Senior Director, Investor Relations at Dover

Thank you, Angela. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through February 22nd and a replay link of the webcast will be archived for 90 days.

Our comments today will include forward-looking statements based on current expectations. 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.

Richard Tobin
President, CEO & Director at Dover

Thanks, Jack. Let's start with the key messages on Slide three. Market demand conditions in the fourth quarter played out largely as we expected and as we discussed at the end of Q3 we adopted a business posture focused on managing down production in certain product lines to balance channel inventories to the detriment of fixed-cost absorption. This puts us in a good inventory position and enable us to match demand and production in 2024. This operating posture also drove solid operating free-cash flow performance in the quarter, which positions us to play offense on the capital deployment front in 2024. We capitalized on strong volumes in several markets and drove margin mix higher for the consolidated portfolio in the quarter. The breadth and diversity of our end-market exposures along with proactive cost-containment and pricing discipline led to another record-high quarterly segment margin in Q4.

We remained active on the portfolio front, we improved our portfolio through synergistic bolt-on acquisitions, including two transactions announced in January at attractive reoccurring and software revenue streams, good growth exposures to our mix. We expect to close the De-Sta-Co sale by the end of the first quarter, which will further enhance our cash position. We entered 2024 in a significantly better financial position than we were 12 months ago. Underlying demand across the majority of the portfolio is solid. Bookings momentum is improving and we drove the first organic bookings growth in eight quarters. Of note, biopharma book-to-bill was above one signifying an improving sentiment in the market which is also evident in the recently-announced results of some customers and channel partners.

While we expect seasonality and idiosyncratic headwinds such as European heat pumps and can making equipment to weigh on volumes in the first half, overall, we expect demand conditions to progressively improve after fourth quarter exit rate through the year. Our recent investments puts us in a very strong position to capture secular growth across numerous end markets like CO2 refrigeration, bioprocessing, datacenter cooling, electrification of heating, cooling and smart compressor controls. In-flight cost actions provide carryover benefits in 2024 with specific projects to be announced during the year. Lastly, our balance sheet has ample capacity to execute against a strong acquisition pipeline and pursue opportunistic opportunistic capital return strategies, as we continue to upgrade the portfolio over time.

Let's go to slide four. Consolidated organic revenue was down 3% in the quarter, bookings were up 2% organically reflecting growing order rate momentum across much of the portfolio. Segment margin was up 100 basis-points to 22% on broad-based productivity and portfolio improvements. Free-cash flow-in the quarter was over $450 million or 22% of revenue on improved working capital efficiency and lower capex. Adjusted EPS was up 13% to $2.45 per share in the quarter. Our guide for 2024 reflects a constructive outlook. We are guiding for organic revenue growth of 1% to 3% and adjusted EPS of $8.95 to $9.15 per share, which represents a 5% to 7% Year-over-Year organic growth, excluding the tax reorganization benefit recognized in the fourth quarter.

Let's skip to slide five. Engineered Products had a solid quarter driven particularly strong volume growth and conversion and waste handling, chassis availability improves in the quarter and the business has reservations for large national waste haulers and municipalities well into 2024, Europe and Asia, shipments were notably lower and vehicle aftermarket bookings improved during the quarter. Margin performance improved 270 basis-points on positive mix benefits and volume conversion on recent productivity investments in the waste hauling business coupled with a solid performance in Aerospace and Defense. Clean Energy & Fueling is our most distribution leveraged segment and as such is where we intervened aggressively on production to facilitate general channel destocking in below ground retail fueling, hanging hardware, LPG components and car wash in the quarter.

Cryogenic components continued the robust growth and our above-ground fueling equipment was up on continued recovery in U.S. dispenses. We believe that our proactive intervention on production in Q4 has allowed excess channel inventory to clear and we expect in this segment to return to normal booking and shipping posture in 2024 with normal seasonality levered to quarters two and three. Imaging & ID posted another as projected stable quarter against a difficult comparable period, with a high degree of reoccurring revenue, end-market and geographic diversity and exposures to growing regulatory requirements for product ID and traceability, this segment remains a consistent performer with strong margins and cash flows. Margin performance in the quarter was exemplary.

Pumps and Process Solutions was up organically in the quarter on strong shipments in polymer processing and precision components. The integration of FW Murphy is off to a strong start with a good reception from our customers and notable reasonable recent wins and substantial reoccurring revenue contracts in remote monitoring and smart compressor technology. Top-line performance in Climate & Sustainability Technologies was impacted by expected volume declines in beverage can making and as well as the recent and abrupt industry slowing in the broader HVAC complex in Europe and Asia, most notably in residential heat pumps, demand degree of which was not incorporated in our previous forecast.

Margin performance was exceptional in the quarter, driven by improvement in food retail, which posted EBIT margins in excess of 15% in the fourth quarter, traditionally a seasonally slower quarter positive CO2, product mix and productivity. The food retail team deserves commendation for their operational achievements to drive significant margin accretion in these past few years, but we still have further runway to improve largely on improved product mix.

I'll pass it on to Brad here.

Brad Cerepak
Chief Financial Officer at Dover

Okay, thanks. Rich. Good morning, everyone. Let's go to slide seven. The top bridge shows, our organic revenue decline of 3%, with acquisitions and FX translation contributed positive 1% to the top-line in the quarter. FX resulted in a $0.01 tailwind in the fourth quarter, but remained a $0.06 headwind for the full-year, primarily driven by intra year movement in the Euro-Dollar exchange rate. From a geographic perspective, the U.S., our largest market was up 2% in the quarter, while Europe was down 16% on lower shipments in retail fueling and HVAC components. All of Asia was up 5%, China which represents about half of our revenue base in Asia was up 14% organically in the quarter, driven by large order timing within polymer processing. On the bottom chart, bookings were up year-over-year due to normalization of lead times.

Now on slide eight. We are pleased with our full-year free-cash flow generation, which came in at $1.1 billion, nearly double the prior year's level on working capital management and lower capex. On the working capital front, as previously discussed, we actively work to liquidate our working capital balances in 2023, with a particular focus on inventory reduction in the back-half of the year. We believe we have further room to go on working capital improvement in 2024. 2023 capex came in lower after reaching a record level of investment in 2022. The step-down in capex in '23 was less pronounced due to the -- due to a one-time $14 million opportunistic purchase of real-estate within our heat exchanger business during 2023. We expect capex to further step-down into '24.

With that, I'm going to turn it back to Rich.

Richard Tobin
President, CEO & Director at Dover

Okay, I'm on slide nine. This highlights the results of recent investments behind several fast-growing platforms in portfolio. Few years a -- few years ago these were nascent product lines, with about $50 million in combined revenue. We saw a significant growth opportunity in these markets and proactively organically, invested in capex and R&D to cultivate technological leadership and provide a sufficient foundation for these businesses to win at scale with customers. We are in the early innings of capitalizing on these investments and are excited about the long-term prospects. Across these markets, we enjoy leadership positions with recognized technology and strong relationships with marquee customers. With about $200 million in combined revenue plan for this year and a double-digit long-term growth trajectory, we expect these platforms to become meaningful contributors to Dover's overall growth profile.

Slide 10 shows progress against our capital deployment priorities after several years of elevated capital investments into capacity, productivity and automation projects. We expect capital expenditures to be lower in 2024. We continue to -- we continue seeking high confidence high-return on investment organic investments and will prioritize those in our capital allocation decisions.

Acquisitions remain part and parcel to building a better and stronger Dover. We have been actively shaping our portfolio in-line with these priorities communicated to investors, both to act through additions and subtractions, as we work to reshape and enhance the portfolio towards higher-growth, higher-return and lower cyclicality. Our cash-flow position and capital allocation optionality are far superior. We expect another year of solid free-cash flow generation in '24 with the added benefit of sale proceeds from the De-Sta-Co that should close at the end of February, at the beginning of March. We have ample balance sheet capacity to continue improving our portfolio through accretive acquisitions for opportunistically return capital to our shareholders.

Moving to slide 11, shows the long-term financial performance of the portfolio. Despite the topline headwinds we experienced in 2023, over the past five years, we have grown organic revenue at a 4% annualized rate, ahead of GDP and industrial averages. Our margin performance over that period was solid, up 410 basis-points in aggregate at a conversion margin in excess of our long-term targets we laid out and primarily driven by operational improvement and product mix.

Finally, let's go to slide 12, our top-line growth in 2024 will be driven by our secular growth exposed end-markets including CO2, datacenter cooling, heating electrification and cryogenic components. The near-term outlook for precision components remains strong as demand for infrastructure investments tied to the energy transition is driving increased demand for our compressor components and engineered bearings. Our waste handling business is effectively booked for the year and should continue its double-digit growth trajectory as chassis shortage abates and haulers worked to replenish -- replenish and upgrade their fleets.

Based on recent history, we have incorporated appropriate caution in our forecast for biopharma during the year but we are confident that we will post a year-on year growth in this end-market and we will update our view as the year progresses. Full-year consolidated operating margin is forecasted to improve on volume, product mix and productivity actions. We've done the hard work to get our channel inventories in balance and expect revenue to build off the fourth quarter exit rate with return to pre COVID seasonality in several businesses. Our portfolio consists of a collection of businesses that operate in attractive and unique niche end-markets. Our business model is flexible and we can quickly to respond in changes in market dynamics, be they beneficial or detrimental to the business. We have numerous cost-control levels and capital allocation optionality at our disposal to deliver on full-year forecasts. I'd like to thank our global teams for the efforts to deliver last year's results and we look-forward to serving our customers, partners and investors in the year and head.

Jack, let's go to Q&A.

Skip to Participants
Operator

[Operator Instructions] We'll take our first question from Andrew Obin with Bank of America. Please go ahead.

Andrew Obin
Analyst at Bank of America Merrill Lynch

Yes, good morning.

Richard Tobin
President, CEO & Director at Dover

Good morning.

Brad Cerepak
Chief Financial Officer at Dover

Hi Andrew.

Andrew Obin
Analyst at Bank of America Merrill Lynch

Just a question. Bookings have turned positive I think first time in eight quarters. How sustainable is this churn and how much visibility do you have in bookings staying positive?

Richard Tobin
President, CEO & Director at Dover

I would expect the booking stays positive throughout '24 based on our outlook right now. I think that the channel -- we've done the hard work on the channel inventory. And that's where we're seeing the inflection in the bookings, whether it'd be biopharma, and we would expect to see the same in Fueling Solutions, so I don't expect this trend -- I don't expect to go negative, unless we're going to have an unforeseen recession in 2024.

Andrew Obin
Analyst at Bank of America Merrill Lynch

That sounds good. And then just a question on biopharma. Do you -- just to clarify, do you have any biopharma recovery in the year, because my understanding is that some of the inventory will become obsolete sometime in the first-half of the year. So what is reflected in your guidance and what's not and I know that it's been tough to call for the past 12 months. So clearly, some degree of caution is warranted.

Richard Tobin
President, CEO & Director at Dover

It's not a coincidence that we did this call behind some of our customers because we hadn't been in front of them and been wrong. We have very little accretion in earnings on biopharma, despite the fact that order rates are beginning to pick-up, we'd rather position ourselves cautiously. And if you go back and look at the transcript, we said, we're just kind of update you where we are quarter-by-quarter, so I think that we're going to wait-and-see what we can say as we do not expect it to be down Year-over-Year, but we have not incorporated, anything, any meaningful amount of operating profit up Year-over-Year. We'll keep that to ourselves until we see the orders.

Andrew Obin
Analyst at Bank of America Merrill Lynch

And am I correct in thinking that some of the inventory does become obsolete because it's FDA regulated?

Richard Tobin
President, CEO & Director at Dover

Yeah you're absolutely correct.

Andrew Obin
Analyst at Bank of America Merrill Lynch

Thank you.

Operator

The next question comes from Andrew Kaplowitz with Citigroup.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

Good morning everyone.

Richard Tobin
President, CEO & Director at Dover

Hi Andy.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

Maybe you could give us some more color on how you're thinking about the 1% to 2% organic growth by segment and then how are you thinking about the cadence of growth in EPS for the year. I know you said you would returned to pre COVID seasonality enriching lot of your businesses. But is this year going to be more back-end loaded given the turn in the short-cycle is happening kind of now.

Richard Tobin
President, CEO & Director at Dover

I think that it will start slowly, so I think the Q1 will be kind of a roll-forward of what we saw in Q4 to certain extent. But again, you've got some difficult comps. I would expect by Q2 the vast majority the accretion will occur in Q2 and Q3 as we ramp production into that and then Q4, Q4 was actually pretty strong for us. Usually, it it's a run for working capital. But again, like every other year. It's going to be highly dependent on production rates that we adopt for Q4.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

Got it. That's helpful. And then you mentioned the intervening in Clean Energy and that you feel-good about your where inventory is now would you say you generally feel that way across the Dover portfolio maybe heat pumps has an exception or heat exchangers for you guys. And then that the Clean Energy do you see good demand in that business or is it more easier comparisons that should drive it in 2024?

Richard Tobin
President, CEO & Director at Dover

Well, there's a lot of moving parts of what's in Clean Energy, I'd like to back up for a moment. I think that operating posture that we adopted at as we move through Q3 into Q4 was predicated upon of dropping production to flush total channel inventory an. I think that we've accomplished that across the total portfolio, as you mentioned. I think what was not incorporated into our Q4 forecasts was the sudden decline in demand on heat exchangers for heat pumps. Again like biopharma, I think that we're going to be very cautious about that for '24, until we see the market return. So, right now. I think that we're calling heat pumps down year-over-year, but I think that that may prove to be conservative. I think that. my own view is it's probably going to flush in Q1 and Q2, and then we'll return to growth on the other side. So overall, outside of heat exchangers for heat pumps. I think that we're in pretty good shape in terms of balance. And so what's incorporated into the one-to-three is basically that's the aggregate of demand that we see. So production demand should be pretty much in-balance. So we will probably build some inventory in Q1 as we ramp back up for Q2 and Q3, but that's kind of the way we see it right now.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

Can you grow DCST with heat exchangers down, Rich, in '24?

Richard Tobin
President, CEO & Director at Dover

No, right, because you've got Belvac rolling down year-over-year which we've expected for three years. If heat exchangers stays with our forecast, which is very conservative, the CO2 revenue growth will not offset that, but I think that we're being cautious until we see what happens when we see whether what all our customers say about heat pump demand for 2024.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

Very helpful. Thank you.

Operator

The next question comes from Scott Davis with Melius Research. Please go ahead.

Scott Davis
Analyst at Melius Research

Hey guys, good morning. It's Scott. Thanks for being brief with your prepared remarks. I really wish everybody would get that memo. It's prudent, it's helpful to get to the ethane point as I say, and get to Q&A, I'll move on, but guys, couple of things come II. One kind of volatility geographically China up 14, Europe down 16 and maybe if you could walk around the world a little bit for us for '24 and expecting a little bit more of a normalization there or maybe some puts and takes and some of the geographic moves. I'll just stop here and open it up.

Brad Cerepak
Chief Financial Officer at Dover

Sure, yeah, look. I think that the China number is kind of. First of all, China as a percent of our revenue now is, I don't know 7% or 8%, 6% now. Okay, 6%, so that number on the law of small numbers, when we make -- when we make a big shipment into China out of polymer processing, it swings the numbers. So the base business that remaining base business that we have in China is a reflection of the Chinese economy, it's not great, but it's flexed up because of that. Europe is really a couple of things. Well, first of all, the European economy is not great. But it's been exasperated in the quarter because of the sudden shift down in demand in heat exchangers for heat pumps where we went from an operating posture of selling absolutely everything we could make to selling hardly anything in about mid September. So I think there was a market-wide recognition that Inventory got over their skiis, a little bit. So that needs to clear. So, what's baked into our forecast next year is, I don't think that we're overly optimistic on Chinese demand. I think the European demand in aggregate should improve year-over-year only because of the fact of that idiosyncratic headwind that we had, but the vast majority of the growth that we've got baked into our forecast is North American driven.

Scott Davis
Analyst at Melius Research

Okay, that makes a lot of of sense. So I think you started off. The last couple of quarters you've made increasingly more kind of tonality positive remarks on M&A. What -- this might be hard to answer, but kind of what does good look like, you know, if '24 is a good year for M&As, some sort of a range of dollars that you'd like to put to work or some sort of a -- something where you guys just have a goal line in mind or that we can start to think about and --

Richard Tobin
President, CEO & Director at Dover

Look, I understand the question, Scott, to look at, at the end-of-the day, the reason that we put the one slide together in terms of firepower. Is it was dynamic coming out of COVID where earnings accretion was great. But there wasn't a lot of cash-flow, because it was all getting hung-up in supply-chain and inventory and everything else. So what we expected going into this year was this is the year we've got to generate a bunch of cash. Now, we've had ample balance sheet capacity during that time period. So it's not like we haven't been doing M&A because we were waiting to build this cash position. But on the other hand I think our ability for M&A and capital return is significantly better just on pure cash than it was 12 months ago.

So you would expect us to be more active in the deployment. Now, we've closed three acquisitions. In the last, what? Five months. We've got a decent pipeline of acquisitions that kind of looked like that. Would we like to do something bigger? Sure. But we've got some return hurdles that if we can't find something within those return hurdles, then we'll return the cash to shareholders. So that's the posture we always adopt. So it's not like we got to go find X amount of M&A every year. We need to find things that are attractive from a return point-of-view and if we can't, it's coming back to our shareholder base.

Scott Davis
Analyst at Melius Research

Fair enough. Best of luck this year, guys, thank you.

Richard Tobin
President, CEO & Director at Dover

Thanks.

Brad Cerepak
Chief Financial Officer at Dover

Thanks.

Operator

The next question comes from Mike Halloran with Baird.

Mike Halloran
Analyst at Robert W. Baird

Good morning, everyone. Just trying everything up when you think about the year and the idea that things get better through the year for you. How much of that is tied to comps and destocking being behind you, versus a fundamental thought process that the underlying demand patterns improve across numerous businesses you have.

Richard Tobin
President, CEO & Director at Dover

I don't think that we're getting over our skis in terms of demand, at the end-of-the day, we've got one to three in topline. Now, taking into that, one to three is, we've got a small amount of dilution because we sold De-Sta-Co versus what we brought into the portfolio. I think from an earnings point-of-view that neutralizes itself, but not from a topline point-of-view when I take a look at the mask. We've got certain parts of the portfolio that have just done fantastically which would be can making equipment and polymer processing equipment where -- are cycling down. So we've known about this market and that's why we've been investing in a variety of other portions of the portfolio to cycle up and and we'll take a look that we had -- we know a couple of footfalls last year that we don't expect to repeat. So net-net, the underlying growth is higher than one-three because we're incorporating the headwinds we have on some of the cyclical portions of the portfolio, but it's not as if we're baking in this return on just overall GDP growth.

I think that what's really baked into our growth is where we have invested. So like we've always tried to highlight on that page. I mean we've taken, we've got a significant amount of revenue growth on three platforms that really didn't exist in the group up until a year-ago of any consequence. So the growth is a little bit better than the highlight figure, just because of the headwinds we got on the cyclical ones and it's largely driven on specific products and end-markets exposure rather than AG. The Fed is going to drop interest rates and GDP is going to expand.

Brad Cerepak
Chief Financial Officer at Dover

I guess what. I would add to that is, unlikely we've been pretty vocal about the fact that price was pretty significant to the top-line over the last two years. That I would say while it's not a big set of numbers here because of the one to three guide there is positive volume growth except for the first-quarter as we come down on this idiosyncratic issue that we're talking about. So I think it is a better setup for us this year than years past where you can actually now think about plant absorption, return to volume, not just price.

Mike Halloran
Analyst at Robert W. Baird

Helpful, makes lot of sense. And then when we think about the pumps business, the industrial pumps piece. Maybe just talk about where you're seeing underneath the hood on that side. Trajectory, order trends etc and how you're thinking about that for the year?

Richard Tobin
President, CEO & Director at Dover

I mean it's decent. It really the industrial pumps side never really had the kind of headwind in terms of stocking and destocking and that's really high-value equipment. So it's more or less fundamental demand. I think there was some caution in the back-half of '23. Just because of the carryover of interest rates and everything else. I think what's baked into our forecast this year is some growth, but not anything extraordinary on the industrial side.

Mike Halloran
Analyst at Robert W. Baird

Right. Makes sense. Thanks guys, appreciate it.

Richard Tobin
President, CEO & Director at Dover

Thanks. Yep.

Operator

The next question comes from Steve Tusa with JPMorgan.

Steve Tusa
Analyst at JPMorgan Chase & Co.

Hey, good morning. Where are you in the like standoff on price and volume and what do you -- what do you assume for price for the year?

Richard Tobin
President, CEO & Director at Dover

Price is about a point to a point and a half and on volume I think --

Brad Cerepak
Chief Financial Officer at Dover

Roughly the same thing. So 50-50 roughly.

Richard Tobin
President, CEO & Director at Dover

So point to point and a half, so it's 50-50 on price-volume. And I think we've done the hard work because of what the argument of against price is inventory balances and I think that one-way you can protect price is not get over your skis in terms of inventory and I think based on what you see in our cash-flow that we've done the hard work for us [Technical Issue] good set up there. So right now, all we need to do is toggle production with orders at this point.

Steve Tusa
Analyst at JPMorgan Chase & Co.

How much do you think that production take-down in the quarter, did that impact margins to a degree?

Richard Tobin
President, CEO & Director at Dover

Yeah. I mean, you can see it in clean-energy for sure.

Steve Tusa
Analyst at JPMorgan Chase & Co.

Got it and then lastly, just any kind of more specific color on total margins for the year, whether it's basis-point improvement or a hard number for margin?

Richard Tobin
President, CEO & Director at Dover

House up for an answer. It is so dependent on mix. We'd like to see -- we'd like to see a quarter or two before we want to -- we want to put a hard number on it, but I think that by and large, we should mix up this year.

Steve Tusa
Analyst at JPMorgan Chase & Co.

Sorry, one more for you each EPS seasonality too, how do you see that kind of feathering in over the course of the year. What do you expect in 1Q and then how does that build?

Richard Tobin
President, CEO & Director at Dover

Right. I think that Q1 will be more of a reflection of Q4. So don't get all worked up about the comp and then we bought, we get the absorption because we ramp from there and then regular seasonality. The vast majority of the accretion in EPS should be Q2 and Q3. And by the time we get to the half year, we'll probably have a good idea where we stand-on Q4 but I think that we put it in all of the caution that we can just in terms of the macro, right. This is our fundamental forecast basically what we think volume is going to be by vertical here that so we think that we can hit these numbers. And if we get a better macro or we get biopharma or return on some amount of HVAC, then we're ready to go, but we prefer -- we prefer rather than trying to lead that like we have over the last couple of years and speaking to those end-markets. It's more of a show-me.

Brad Cerepak
Chief Financial Officer at Dover

On those two businesses. Specifically we're talking about Schweppes and CPC when the volume does come, they do convert. Right. And the mix is up. So that's the good news.

Steve Tusa
Analyst at JPMorgan Chase & Co.

Great, thanks a lot.

Richard Tobin
President, CEO & Director at Dover

Thanks.

Operator

The next question comes from Joe Ritchie with Goldman Sachs.

Joe Ritchie
Analyst at The Goldman Sachs Group

Hey guys, good morning. Hey, so Rich a lot of discussion around your portfolio these days. This is curious. What you'd like to share about the potential to unlock value by divesting some of the pieces of the portfolio. Any comments you'd like to share that would be great.

Richard Tobin
President, CEO & Director at Dover

I mean, we're committed to managing the portfolio. I think we sold De-Sta-Co I think at a pretty good price in 2023, we've just -- we've closed three acquisitions over the last five months, where I think are margin-accretive and more growth-oriented assets. So I think we'll do the same thing. I think that bigger portfolio moves you need balance sheet optionality and I think that if you look at what was the knock-on effect of the really good cash-flow that we have this past year is our balance sheet optionality is in a really good place. So which will be a little be more prosaic about what that means, but at least, the building blocks that we need to continue to shape portfolio of improved year-over-year. They put it that way.

Joe Ritchie
Analyst at The Goldman Sachs Group

Okay, that's helpful. And I missed some of the initial commentary around the guide. I know that there organically I think you guys have talked about maybe 5% to 7% EPS growth, but just just maybe kind of help me understand the low-end, the high-end, what kind of shapes, both of those?

Brad Cerepak
Chief Financial Officer at Dover

Well, I mean, the headline figure at one, two three, you need to take into account that we know where we have cyclical headwinds going-forward. So we bank significant profits out of polymer processing and can making equipment that we knew this headwind was coming. So in that one-two three we're making all that up, we've got a bit of a headwind in terms of the disposable -- disposal of De-Sta-Co coming out that the acquisitions. I think from a profit point-of-view neutralizes it not from a topline point-of-view. And then I think that we've unlike previous years where we've kind of led forecasting in terms of biopharma and. HVAC components, because those are battlegrounds, we've taken a very cautious stance on that. And we're going to wait to see how the market develops.

Joe Ritchie
Analyst at The Goldman Sachs Group

Okay, good enough. Thanks guys.

Operator

Thanks. The next question comes from Jeff Sprague with Vertical Research.

Jeff Sprague
Analyst at Vertical Research

Hey, thank you and good morning everyone. Hey, Rich and Brad, effective capital deployment. If I think about what you've laid out in the guide here today. Is there any perspective capital deployment on share repurchase or deleveraging or anything like that in the numbers?

Richard Tobin
President, CEO & Director at Dover

Look, if you calculate the EPS accretion on a cautious top-line that you would come, you come with an incremental margin, that is pretty high, right. So at the end-of-the day what's incorporated in their is a little bit of capital deployment, whether that'd be in M&A activity or. Share repurchase. The timing of which we'll let you know what happens.

Jeff Sprague
Analyst at Vertical Research

And then, on your slide 10, right. I mean, you do have. Two segments that are net negative M&A. I mean this does this kind of inform where we're headed over-time there's Jensen TCSB obviously CO2, but. Should we take that chart at face value on where you're. How you're thinking about reshaping the portfolio.

Richard Tobin
President, CEO & Director at Dover

Well, that chart actually flips to the chart that we put out in 2020 in terms of the hierarchy of capital allocation to a certain well. I think the DPS and DCF kind of flipped. But that's because you can't control. In terms of closing acquisitions, I mean overall, yes. I mean have you think that Engineered Products outside of defense has been inorganic issue for us for some time and our organic and I think that what we've done with the total investment that would be inorganic play also, so yeah. I think that the hierarchy, there they may flip around a little bit, but it's largely.

Brad Cerepak
Chief Financial Officer at Dover

And then just on the back on the orders, Rich, that's strengthened orders in the quarter, was that all bio or is it something else notably pickup I think it's broad-based and I think it's more influenced by what we call the thermal connectors.

Jeff Sprague
Analyst at Vertical Research

All right. Thank you.

Richard Tobin
President, CEO & Director at Dover

You're welcome.

Operator

The next question comes from Julian Mitchell with Barclays.

Julian Mitchell
Analyst at Barclays

Hi, good morning. Maybe. I just wanted to start with the operating margins, so. I realize you're not giving us sort of firmwide number for this year or much segment color so maybe trying to think about some of the firm-wide drivers of margin this year, so. I think there's some positive volume leverage, because those are up one-one 0.5 points price-cost is broadly neutral M&A and divestments seems maybe neutral what you've announced so-far. So. I wondered if those three assumptions were right, and then mix. I guess. Anything you'd characterize from that all those moving parts, sort of biopharma stable heat pump-down polymer and can down maybe Fueling up like in aggregate, is that much of a mix impact do you think on margins in your guide.

Richard Tobin
President, CEO & Director at Dover

Well, you touched on the wall, Julian. Yeah. I mean, look, we. We cut production in DCF to manage inventories. So that is not just the loss products that we sell. It's also and we did it on the underground portion of the business, which is highly margin-accretive. So we get that back and it's reflected in Q4 and it's reflected in Year-over-Year. So we would expect as we balanced production, but that that returns engineered products, really the bulk of the margin accretion in 2023 was driven by ESG. But that was more or less back-half. And we expect a full-year of that going into. 2024 and if you recall, we had a little bit of a hiccup with a implementation of ERP and VSG last year which we don't expect to reoccur again.

Julian Mitchell
Analyst at Barclays

So that's helpful. Would it be close at 25% margins. That's great.

Brad Cerepak
Chief Financial Officer at Dover

So that's more. A revenue issue for us. DPS has had a biopharma headwind now for two-plus years. What we're calling here. It's no longer a headwind and whatever we get on the top side, which we're not baking in a lot right now are hardly anything is going to be accretive and the CST has got right now, and our forecast would be margin down on mix because which we knew was going to come down and our cautious stance on heat pumps. If we're wrong about being cautious about heat pumps, then that will flex that the rules. The headwind will be less than we've got modeled into our into our forecast for the year.

Julian Mitchell
Analyst at Barclays

That's very helpful. Thank you. And. I just wanted to follow-up, when you were talking about sort of some of the quarterly earnings trends.

Richard Tobin
President, CEO & Director at Dover

So do we assume sort of Q1 earnings or EPS is. Flattish. And then as you said, you get into the meat of the earnings growth in Q2 and Q3. Yeah, I'm not going to go, it's Q1 will be more of a reflection of the carry-forward, a Q4. What will get us some amount of production ramp, but a lot of bad comps and then we accelerate right out of there.

Julian Mitchell
Analyst at Barclays

That's great. Thank you.

Richard Tobin
President, CEO & Director at Dover

Welcome.

Operator

Your next question comes from Nigel Coe with Wolfe Research.

Nigel Coe
Analyst at Wolfe Research

Thanks, good morning. You clearly don't want to give too much color on margins, but. I just wanted the crack here clearly margin leverage is a big driver of earnings this year. So maybe just talk about what you've baked infrastructural cost savings. I know you've got some roll-forward from some of the actions you took in 2023, but maybe just itemize any other significant cost actions you're taking driving margins in 2024.

Richard Tobin
President, CEO & Director at Dover

Yeah. I will go back and look at the transcript, Nigel. We do have carry-forward from actions that we took in the back-half of the year. We've got some coming. I'm not ready to calendarize it yet because they are not fully baked. But we do have a list of. We do have a list of cost actions which are more of a revenue hedge. So if we if we take those actions. And we're right on the demand profile of those should actually be accretive to us. So they're not necessarily baked-in at this point. And the reason they're not baked-in is because we were working on the timing in terms of the execution.

Nigel Coe
Analyst at Wolfe Research

Okay. And then on pricing, been very successful in pushing price. I mean I think we've building a little bit nervous about some of the more raw-material sensitive businesses Phoenix and maybe parts of EFG as well, but it sounds like your customers are forecasting inflation on the components, especially within the VAC and markets. So just curious what you're seeing in terms of pricing power across the portfolio in 24. Specifically within some of these more raw-material sensitive end-markets.

Richard Tobin
President, CEO & Director at Dover

Yeah, it's interesting. I mean, if you go back and look at our realized pricing and I'm talking about the pricing that's fallen all the way to the bottom-line. It has not been dramatic for us and it's a source of consternation around here of what is capable in pricing. So if we look at some of our end-market customers and what they've pass-through on pricing. I guess that we've been jealous for lack of better. So to us, it's been we've I don't want to be negative. I think we've taken some price. I don't feel that we've got a couple of businesses that have escalation, deescalation clauses in terms of inputs.

I think we've been on the front foot. In those businesses of being proactive about locking in our pricing, especially going into this year. So right now we've actually got a little bit of room if we had to give back pricing. But that's not my expectation. Our issue is always been that the way to defend pricing is not to get over your skis in inventory and that's why we took it into the to a certain extent, to kind of manage that position at the end of last year going into kind of the demand environment, at least the setup as we see it today. I think that we feel-good about our ability to protect price.

Nigel Coe
Analyst at Wolfe Research

Great. Okay, thanks. Rich.

Operator

Our final question comes from Deane Dray with RBC Capital Markets.

Deane Dray
Analyst at RBC Capital Markets

Thank you. Good morning, everyone and thanks for fitting me in. Was there any comments puts or takes on how January started. And just a couple of minutes ago the ISM January, new orders came out at above 50 for the first time. I think like a year and a half at 52.5, but any puts and takes from your perspective there.

Richard Tobin
President, CEO & Director at Dover

I don't know. So. I would expect if it's been terrible. I would have heard something, usually when it's positive, no one tells me anything, So we haven't even closed a month yet, so but I'm unaware of it being worse than what we what we expecting.

Deane Dray
Analyst at RBC Capital Markets

All right. Good to hear. And then just a quick question. Datacenter cooling came up a couple of different times. Your heat exchangers play a key role there. Do you have a sense of how that is geared towards air-cooling versus liquid cooling because there is a big investment cycle starting. I mean, it's more than 30% growth in liquid cooling side, would you participate.

Richard Tobin
President, CEO & Director at Dover

It's almost exclusively levered towards liquid cooling.

Deane Dray
Analyst at RBC Capital Markets

Yeah, and you're not tied to a particular vendor, you'll be a component supplier to that, is that correct?

Richard Tobin
President, CEO & Director at Dover

That's correct. When we see thermal we mean -- we mean liquid cooling in data centers.

Deane Dray
Analyst at RBC Capital Markets

That's great. We supply everybody. It's not just heat exchangers it's connectors. Understand.

Operator

[Operator Closing Remarks]

Corporate Executives
Analysts

Alpha Street Logo

Powered by Quartr

Transcript Sections

Combine the QQQ, IWM and SPY in one trade (Ad)

If you’ve been investing in the major indexes for the last 20 years, you may need a new strategy. Because the Dow Jones has returned just 349%... The Russell 2000 has returned just 397%... And the S&P 500 has returned just 450%. And although I can’t guarantee results or against losses… I want to tell you about my “2-Click Trade” that has encapsulated more than the return of ALL THREE OF THOSE INDEXES COMBINED… Plus, it targets multiple overnight payouts in a month with 84.3% accuracy! While I cannot promise future returns or against losses…

You can find out about this “2-Click Trade” here.