Dover Corporation

Your program is about to begin. If you need any audio assistance during your call today, please press star and zero. Good morning and welcome to Dover's third quarter 2021 earnings conference call. Speaking today are Richard J. Tobin, President and Chief Executive Officer, Brad Serpak, Senior Vice President and Chief Financial Officer, and Andre Galuk, Vice President of Corporate Development and Investor Relations. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, please press star and the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key on your telephone keypad. As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recordings of this call. If you do not agree with these terms, please disconnect at this time. Thank you, and I would now like to turn the call over to Mr. Andre Galuk. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining our call. This call will be available on our website for playback through October 26, and the audio portion will be archived for three months. Dover provides non-GAAP information, and reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on 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-K and our most recent Form 10-Q for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law. With that, I will turn this call over to Rich.

Thanks, Andre. Good morning, everyone. Let's go to page three. Dover Corporation and its operating companies had a solid quarter. The performance stats indicate that our product strategies, coupled with our ongoing productivity initiatives, continue to deliver top-line growth, margin accretion, and attractive cash flow to our investors. Our revenue and bookings growth continue to outpace our pre-pandemic levels, and we exit the quarter with a record high and sequentially increased backlog while posting top-line growth of 15% over the comparable period. Demand strength was broad-based, as each segment posted year-over-year growth in bookings and a book-to-bill above 1. Revenue growth, positive product mix, and ongoing productivity initiatives drove comparable operating margins up, resulting in a 31% increase in U.S. GAAP diluted earnings per share Our free cash flow performance was strong with an 18% year-over-year increase despite significant investments we've made in inventory as we begin to reap the benefits of our investments in the centralization of financial processing activities. We continue to enhance and improve our portfolio with several acquisitions completed in the last three months and the divestiture of our commercial food service business announced last week. Our organic investments and capacity expansions and productivity projects are on track, providing us the building blocks for the future top line growth and margin expansion. As one of the first multi-industrials to report each quarter and because of our wide end market exposures, we have the pleasure to be the operating environment bellwether. So let's get on the front foot here by providing some color on inflationary inputs, labor and supply chain challenges, so that we have time to discuss the constructive demand environment for 2022 in the Q&A. Let me start by saying that we're particularly concerned that there have been no discernible policy changes, particularly in the US, to deal with these headwinds. And in fact, many proposed policies run the risk of extending their duration. We take no satisfaction in the fact that we've been telegraphing these issues all year and incorporating them into our forecast of the businesses that bear the brunt of these challenges, which I'll expand upon during the segment review. We have taken the appropriate actions to offset these headwinds moving into 2022, and we are comforted by the fact that we've been given the opportunity to demonstrate the resilience of our business model and the strength of the breadth of our product and geographic market exposures that are ultimately reflected in these quarterly results. To be clear, We are very constructive about 2022 demand for our products and services and remain optimistic that there will be a recognition that protecting the duration of the current strong economic demand environment needs proactive policy decisions. We are raising a full-year EPS guidance as a result of our strong year-to-date performance. Our updated forecasts do not incorporate any material improvement nor deterioration of the challenging operating environment in the fourth quarter. Our priorities remain the same, supporting our customers with products and services for the long term and the health and welfare of our employees. I'll skip to slide four, which provides a more detailed review of our results for the third quarter. So let's move to slide five. Engineered products revenue is up 14% organically with a significant portion of the growth from pricing actions. Vehicle services posted a strong top line quarter, and market indicators remain positive, with vehicle miles driven recovering and average vehicle age continuing to increase. Industrial automation demand was up double digits with strong activity in Americas and China. Environmental services group revenue was up year over year, and its backlog remained strong moving into 2022. Aerospace and defense posted a decline year over year, largely a result to changes in program shipment timing. The margin performance in the quarter was unfortunately what we expected to occur as we progressed through the year. Our engineered product segment, as we've discussed previously, has the largest exposure to raw materials, assembly labor as a percentage of cost of goods, and supply chain complexity. As such, it is more than just a price-cost issue, where even an equilibrium drives negative margin performance. It is exasperated by numerous component supply issues that necessitated us to intermittently curtail production to stabilize the manufacturing system in the quarter. Our management team is doing exactly what we'd expect of them to protect profitability in the short term while managing the relationships with our strategically important customers. I have absolute confidence that the profit margin in this segment will bounce back as we move into 22. As a result of actions already taken in price, and as raw materials and supply chain constraints moderate as can be seen in the raw materials futures and stabilizing container shipping rates. Fueling Solutions is up 3% organically in the quarter on solid demand in North America for above-ground and below-ground retail fueling. We believe our production schedule and delivery times are driving share gains, particularly in the above-ground category. Vehicle wash posted another strong quarter with some encouraging customer conversion and cross-selling benefits from our recent ICS acquisition. Activity in China remained subdued, driven by the lasting impacts of COVID and near-term uncertainty related to energy supply. Fuel transport components were negative for the quarter, but we believe that this is set to improve moving forward. Margins in the segment declined 150 basis points in the quarter as productivity Headwinds from supply chain constraints and subcomponents and negative mix more than offset higher volumes and pricing. We have taken the appropriate actions on pricing to counter these headwinds going forward. Sales and imaging and identification grew 7% organically. The core marketing coding business grew well on good demand for printers and consumables. Serialization software also grew ahead of expectations and we are working to add additional resources here as we integrate the recently acquired Blue Byte brand management software into our solutions. The digital textile printing business was up significantly year over year against a low bar comparable quarter and is continuing its gradual recovery. Margins in imaging and ID improved by 250 basis points as volume leverage, pricing and productivity initiatives more than offset input cost inflation. Pumps and process solutions posted another solid quarter at 25% organic growth. Demand for biopharma connectors and pumps continued to be strong. We continued to expand clean room capacity for our biopharma connectors and single-use pumps in the period, and we are encouraged by specification wins in Emtek biopharma flow meters, which we acquired last year. Industrial pumps were up based on broad-based end customer demand with particular strength in China. Precision components was up year over year as compression, OEM, and aftermarket businesses continued their recovery. Polymer processing was down in the quarter due to a combination of shipment timing and a very strong third quarter from the prior year, though new order rates remain strong and outlook is positive moving into 2022. Margins in the quarter expanded by a robust 630 basis points on strong volume, fixed cost absorption, favorable product mix, and pricing. Top line results in refrigeration and food equipment remain strong, posting 16% organic growth. Revenue in beverage can-making equipment doubled in the quarter. The business is booked into late 22 and is taking orders for 23. the heat exchange of business grew on robust demand in all geographies led by residential heating and industrial end markets and a recovery in the global commercial HVAC demand. Order intakes continue to exceed our ability to ship, so we are adding additional capacity in two geographies to ensure that we can meet forecasted demand in 2022. Demand in food retail remains robust with elevated bookings and backlogs across all our product lines. However, Much like our engineered products business, we have a difficult time with labor constraints and in particular sub-component supply, which has necessitated significant operational costs in logistics, intermittent production curtailments, and in one case, the deferment of a delivery into 2022. Again, management is straddling cost recovery actions and meeting demands of our customers, but it clearly comes with a cost. Margins were largely flat in the quarter as excellent operating performance in SWEP and Belvac offset refrigeration headwinds despite their smaller revenue base.