Dover Corporation

Please stand by, your program is about to begin. If you need audio assistance during today's program, please press star zero. Good morning and welcome to Dover's first quarter 2022 earnings conference call. Speaking today are Richard J. Tobin, President and Chief Executive Officer, Brad Serapak, 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. If you would like to ask a question during this time, press star and then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. 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, and it is now my pleasure to turn the call over to Mr. Jack Dickens Sir, please begin.

Thank you, Chelsea. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through May 12th, and a replay link of the webcast will be archived for three months. Dover provides non-GAAP information. 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 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.

Thanks, Jack. Good morning, everyone. I'm on slide three. which shows the detailed US GAAP and adjusted quarterly results. So let's go to slide four and take a look at the performance highlights. Our results in the first quarter were in line with expectations, our expectations. The demand for our products and service continued to be robust across the portfolio, and the management teams of our operating companies did a solid job of navigating various challenges during the quarter. Going into the quarter, we had appropriately forecasted the supply chain and input inflation headwinds, but we did not forecast significant geopolitical destabilization, nor the return of pandemic challenges in China, which negatively impacted some businesses in our portfolio from a demand and supply chain perspective. We were able to largely offset these unexpected headwinds through robust production performance, particularly late in the quarter on the back of our backlog strength. Let's move to the notes. Organic revenue was up 9% year-over-year in the quarter on strong demand across the majority of the portfolio. Backlogs remain at record levels, up 54% year-over-year, and 5% sequentially was booked to bill above one in all five segments. Operating margin performance in the quarter was below our expectation. Planned volume leverage, productivity, and tight cost controls were able to dampen the forecasted negative impact supply chain constraints and negative price cost embedded in older backlogs, in older orders in the backlogs of certain businesses. But our actions were short of fully offsetting unscheduled production interruptions caused by supply chain constraints and severe weather events, which negatively impacted volume and cost absorption and had an unfavorable mix effect on margins. We expect this to be recovered over the balance of the year. During the quarter, we continue to invest organically in capacity expansions and productivity initiatives to drive revenue growth and operational success. We recently acquired a unique intellectual property portfolio used in electric-powered and hybrid waste collection vehicles, which we plan to showcase a fully electric refuse vehicle built for one of our municipal customers at Waste Expo in May. Our first quarter performance demonstrated again the strength of our diversified portfolio of businesses and our commitment to continuous improvement and operational rigor. Due to the dynamic environment in which we are operating, quarter to quarter results will be noisy, which I'm sure we'll discuss at length during the Q&A. But keep in mind that we have a robust backlog and that the businesses that face challenges in the back half of 2021 are positioned to drive robust performance as we get through the tougher comps of the first half of 2022. Despite the macro headwinds, we are well positioned to deliver our full-year revenue guidance of 79% organic growth and adjusted EPS of $8.45 to $8.65 a share. Let's go to slide five. Engineered products, Revenue is up 15% organically in the quarter. Demand continues to be robust across much of the portfolio, and we have considerable visibility as a result of our robust backlog position. Comparable operating margin was down largely as a result of price cost and supply chain challenges, but sequentially improved as production performance ramped up and older backlogs shipped. We expect this dynamic to continue for the balance of the year. Clean energy and fueling was flat organically as the expected roll-off of EMV demand in North America retail fueling was offset by growth in other businesses. Demand was strong across the balance of the portfolio of businesses with particular strength in clean energy components, vehicle wash, blow ground, and fueling components. Let me unpack the margin performance here before we make this an EMV only story and draw the wrong conclusions of the projected margin trajectory for the balance of the year. As we previewed last quarter, we incurred roughly 20 million in new acquisition related depreciation and amortization in the quarter driven by our clean energy acquisitions in late 2021. This represented a 400 basis point headwind to segment margins in the quarter. The balance of the margin dilution was the result of product mix, which is EMV driven, and Q1 supply chain and production challenges. Unfortunately, we lost a week of production in March due to a weather event at one of our main production facilities in Texas. Setting aside acquisition accounting, we expect the segment to deliver robust, absolute revenue and profits for the full year. Sales in imaging and ID declined 1% organically as volumes in our core marking and coding business were constrained by component shortages as well as China lockdowns and reduction in business in Russia, more than offset growth in our serialization and brand management software businesses. Digital textile printing continued its gradual recovery. Q1 margins in imaging and ID were down to lower volumes and higher input costs. Pumps and process solution posted another strong quarter at 13% organic growth. So strong volumes across all businesses and geographies. Demand remains strong in core biopharma activity where drug R&D projects, which that were sidelined during COVID came back strongly. But we did see normalization and order rates for COVID driven biopharma components as demand for COVID-19 vaccines and therapies moderate. Margin performance was solid in the quarter on strong volumes, fixed cost absorption, and favorable. Top line results in climate and sustainability technologies continued to be robust, posting 17% organic growth and strength across all businesses and major geographies. Margins were up in the quarter as robust volumes, solid operating performance, and improved price costs offset cost inflation and input shortages. I'll pass it on to Brad from here.

Thanks, Rich. Good morning, everyone. Going to slide six. On the top is the revenue bridge. FX was a 2% or 43 million headwind to the 9% organic growth, resulting in 5 cents of negative EPS impact in the quarter. Our FX forecast for the remainder of the year does not assume any changes to the prevailing exchange rates, which creates a headwind for the year versus our prior guidance. M&A contributed $53 million to the top line in the quarter, a product of $83 million from acquisitions partially offset by $31 million from the unified brands divestiture. We saw solid organic growth across all geographies with notably strong performance in Asia and the Americas. China, which represents approximately half of our business in Asia, was up 20% organically in the quarter. Moving to the earnings bridge on slide 7. Adjusted segment EBIT was down $7 million in the quarter, and adjusted EBIT margin declined 200 basis points as improved volumes decreased. Continued productivity initiatives and strategic pricing were more than offset by input cost inflation, production stoppages, as well as acquisition-related amortization that drove a roughly 100 basis point headwind. Adjusted net earnings improved by $13 million driven by higher segment EBIT, excluding AD&A and a favorable tax rate. The effective tax rate excluding discrete tax benefits was approximately 21.7% for the quarter, same as the comparable period. Discrete tax benefits were $10 million in the quarter or $4 million higher than in 2021 for approximately $0.03 of year-over-year EPS impact. Now on our cash flow statement on slide eight. Free cash flow declined in the first quarter and was slightly negative, driven by working capital investments in inventory and heavy shipments in March, driving higher receivables as well as higher compensation payments. Capital expenditures for the quarter were principally in support of our robust growth expectations across several businesses. Q1 is seasonally expected. our lowest cash flow quarter, and Q1 last year was a bit of an outlier due to post-COVID recovery. With that, I'm going to turn it back to Rich.

Okay, I'm on slide nine. This slide includes our current view of demand outlook, operational environment, and margin drivers for the remainder of the 2022 buy-in. We expect top-line and engineered products to remain robust based on solid backlogs and sustained strong bookings, Vehicle services continues to ship against a record high demand driven by new vehicle service facility builds, replacement of service equipment, growth in wheel aligners, as well as share gains. Orders for refuse trucks and software solutions are robust, with new order rates pushing well into the second half of the year. Momentum in industrial automation remains strong, particularly in China and within automotive. Industrial winches continue to recover with notable strength in natural resources and energy. and aerospace and defense will remain muted in Q2 on order timing, but should accelerate in the second half. As expected, price cost was negative in the first quarter in this segment, but we expect it to flip positive in the second quarter as several rounds of price increases cycle through backlogs. We have also introduced other mechanisms to dampen the impact of commodity cost volatility in our capital equipment businesses. All in, we expect margins to improve sequentially as the year progresses. We expect clean energy and fueling to post robust growth for the full year as solid growth in below-ground fuel transport, vehicle wash, and software solutions, coupled with our acquisitions in clean energy and components, which are off to a strong start, should more than offset the roll-off of EMV demand. Excluding the $45 million of incremental deal-related amortization expenses in 2022, of which approximately $20 million were occurred in Q1, We expect full year margins to improve on volume and mix. Demand conditions and imaging and idea are expected to remain solid as component shortages and core marketing coding subside. Serialization and brand protection software should contribute positively to robust bookings and backlog. Digital textile printing is recovering. We expect margin in this segment to be stable. Order trends and pumps and process solutions remain robust for much of the segment. Activity industrial pumps and polymer processing is solid. And precision components continues its upward trajectory aided by increasing activity at refineries and petrochemical plants and a recent uptick in orders for OEM gas compressor new builds. Our biopharma business remains strong but likely lumpy intra-year from a demand perspective as our customers transition from COVID MNRA vaccine production to alternative therapies. Subject to year-to-year shifts and mix, we expect a 30% plus margin in this segment as the new normal going forward. We expect climate and sustainability technologies to post double-digit organic growth this year driven by its large backlog and sustained order rates. New orders in core food retail businesses have been healthy across product segments. Our case business within food retail is now booking into 2023. Our heat exchanger business is positioned well on strong order rates across all geographies and end markets. And Belvac packaging equipment business continues to work through its record backlog. They are also booked for 2022 and are taking orders for 2023. Q2 and Q3 are seasonally strongest quarters for volumes and margins in the segment. We expect margins to improve significantly in 2022 on improved volume leverage, positive price-cost dynamics, and normalizing supply chains. Okay, here we go. This is the new slide and I'm going to attempt to provide some clarity on bookings and backlog by segments since this subject has been actively debated and I can see continues to be this morning. First, total backlog is up 50% year over year with double digit growth across all segments despite robust revenue performance in the last 12 months. All segments also posted sequential growth in backlog during Q1. Next, our book-to-bill in Q1 was 1.1, with all five segments above 1 despite 9% organic revenue growth in the quarter. This is a very good picture. Top-line visibility is a great thing from an operational and planning perspective, and it's an important pillar of our four-year guidance. Intuitively, we would not expect these elevated order rates and advanced ordering patterns to persist, especially in the short cycle portion of our portfolio as supply chains improve. But we see two factors influencing current order patterns. First, it's reasonable to assume that customers who expect persistent inflation will continue advance ordering to lock in favorable, in the attempt to lock in favorable pricing. And second, customers expecting robust demand in 2023 will remain cautious on supply chain stability want to ensure supply. As you can imagine, we spend a lot of time on this topic and at present do not have a conclusive view despite booking into 2023 in long cycle capex driven portions of the portfolio. So we'll just have to adapt accordingly and keep a keen eye on working capital as the year progresses. I would, however, caution that we need to be careful about drawing definitive conclusions on changes in comparative order rates or backlogs. The scale of our typical operating company gives us significant flexibility to adapt to changes in the demand environment. And we manage them all uniquely based on the operating model, business cycle, and competitive stack. I'm absolutely confident that we have the tools to maximize profitability to the upside scenario and to protect it on the downside as we approved in 2020 and 2021. Dover's portfolio has significant diversification from a product and end market exposure perspective, many of which we believe has secular growth tailwinds. And as such, despite the ongoing macro and geopolitical challenges at present, we are continuing to invest organically behind areas of strength. Moving to slide 11, again, we're reaffirming full year guidance for the year. And let's move on to Q&A.

If you would like to ask a question, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. We ask that participants limit themselves to one question and one follow-up question. Our first question comes from Jeff Sprague with Vertical Research Partners.

Thank you. Good morning, everyone. Hi, Jeff. Good morning. Hi. I guess a couple things. I mean, first, Rich, you sound a bit more confident on price cost over the balance of the year. You also mentioned kind of older backlog working its way through the system. I would imagine you have a pretty good handle on that, but maybe you could just elaborate a little bit more on kind of the residual tension on converting existing backlog and some of these steps you said you took to kind of dampen the volatility on cost inputs going forward?

Sure, Jeff. I mean, we were chasing price cost last year. And one of the good things, I mean, the good news is having a high backlog, you get visibility, which is helpful to planning, let's say. The bad news is that that black backlog is building in advance of input cost headwinds. You're chasing it to a certain extent. So as you're You're basically, without repricing backlog, you go negative price costs, which we saw in Q4 last year. If you remember what we talked about at the end of the year, I said the disappointing performance for us in Q4 was because of supply chain, we did not convert as much backlog as we would have liked, which would have strangely... Our revenue would have been up and our margin would have been down in Q4. And what we've done is we've carried some of that into Q1. And I think if you remember what we said about modeling Q1 this year was that it was a safe bet to model it against Q4 of last year. And if you go do the comparisons, we're pretty much spot on. But we are shipping that older backlog, right? So now we're going to squeeze price cost in Q2 significantly. and then flip significantly positive, at least in three portions of the portfolio, on the back half of the year, in particular in engineered products, in clean energy, and in climate, where we expect to see a significant benefit in the back half of next year on price cost and because of the comps are significantly easier. I'll call your attention to Our Q2 performance last year, I think, was the highest margin that Dover ever posted. So the comp that we've got ahead of us is a tough one. I would tell you that, I guess, before somebody asks, again, I would point to Q2 last year as a proxy for performance of Q2 this year.

Great. Thanks for that. And maybe just a little bit of a kind of macro color, for lack of a better term, I guess, but obviously the world feels different the last six or eight weeks. I mean, you know, the backlogs and orders do look robust, but are you seeing any indication, you know, trepidation from customers about taking backlog or, you know, shifting their places in line or anything that would kind of undermine your confidence in kind of the deliverability of the backlog?

Well, I think that... From a top concerns point of view, this China COVID situation is new news in the quarter that we've had to navigate here. I don't have a view on where this goes. I'm hoping, based on the news this morning, that we're not going to move on to Guangzhou or somewhere else, but that is not helping from a supply chain point of view. Look, so far... The pricing that we've passed has not been to the detriment of backlog. So we haven't had call offs in that backlog. I think the biggest issue for us is the supply chain side of the business. Does it get better? Does it get worse from here? Um, we'll see. And from our customer's point of view, they again are dealing with supply chain issues. and labor availability issues. So that's where you've got a lot of push and pull of we're working really hard to get the product out the door and we're working really hard with our customers to make sure they're ready to receive it at the same time because they're dealing with their own, call them supply chain issues. So right now we don't see it. We don't see much of a risk in terms of shipping our backlog other than our own constraints. And so, as far as the customer taking it, but we'll see going from here.

Great. I'll leave it there. Thanks for the call. Thank you. Thanks. All right.

Thank you. Our next question comes from Andy Kaplowitz with Citigroup.

Good morning, Rich. Hi, Andy. So, DPPS, obviously, book-to-bill, still positive. You know, orders did turn down on tough comps, and It looks like you lowered your 22 revenue forecast slightly in that segment, and you called BioPharm, I think, lumpy. Can you give us more color on what percentage of DPPS has had the COVID-related tailwinds and is normalizing versus the rest of the business? And ultimately, how are you thinking about Dilwer's overall ability to grow DPPS at this point?

Yeah, I think that we're going to go through a little bit of an air pocket here in terms of the demand function because, again, of this transition from COVID therapies to non-COVID therapies. I think on the long run, we believe that this is a growth market. And I'd like to thank Dan Hur for going before us because I think they explained it far better than we're going to be able to do it. But we would expect in the middle of this year to have a reduction in order rates as that transition takes place. That's accommodated into our earnings forecast for the year. I don't believe that this is this COVID related issue is an air pocket where revenues are going to drop never to be seen again. We think it's an entry year conversion and we feel really good about our position in single use.

Thanks for that, Rich. And then could you give us more color into the improvement you're seeing in DCST? Obviously revenue growth was strong in the quarter, but is it possible at this point to quantify How much added growth your initiatives in that segment are? You know, CO2 systems, Belvac, SWEP, how much of that do they add to the business? And do you still see that segment hitting your mid-teens margin target for the year?

The two-year CAGR on Belvac is now in the 40s. The two-year CAGR on heat exchangers is in the 20s. So it's not before we get to refrigeration. So you've got two big principal drivers, which are margin accretive to the segment, by the way. The two-year CAGR on refrigeration business is about 16 and a half, 17, and it's widespread across the portfolio, the fastest growing portion being the systems business, as we've discussed before. We'll take all the system business that we can get, and we're trying to maximize the profitability on the case business, meaning that we're trying to, we're not running and taking all the business that's out there. So, so far so good. Still a lot of supply chain issues, because these are complicated assembly processes, but Q2 and Q3 margins should be interesting.

I guess we'll leave it at that. Thanks, Rich.

Thank you. Our next question comes from Steve Tusa with JP Morgan.

Hey, guys. Good morning. Good morning. Good morning. Can you just – you said 2Q is going to look a lot like 2Q last year. What's the organic growth, do you think, in 2Q? I mean, it was a pretty big step up in 2Q last year, so maybe –

Yeah, look, I mean, I think you can calculate that, right, if I say it's going to look similar at the end of the day. I don't have that at the top of my head. I mean, I know that from a data point, but I'd have to go ask one of my colleagues here about trying to extrapolate that into organic growth. I can tell you it should be similar to Q1.

Got it. Okay. Sorry, just trying to do less work these days. Looking for a little help there. And so that means that kind of the back half you're looking at, I don't know, like 7%, 6% to 7%. And if that's the right number, that would imply, I guess, somewhere in the range of a 45% to 50% incremental for the back half of the year.

Well, the back half of the year, the incrementals are going to be significant because the comps with all the operational difficulties that we had last year, I mean, we lap all that. Right. We're shutting down facilities, and we had negative absorption. We had reduced volumes, negative absorption, everything else, and the beginnings of negative price costs. So, you know, if all things being equal and the supply chain and the macro doesn't get worse from here, Yeah, I mean, our incrementals in the back half of the year, particularly in engineered products and in clean energy and in climate, should be robust.

Yeah, I would add to that, I guess, to say, you know, we'll see where the macro goes on commodities, but as we think about the back half and the price material implications – I would say our forecast now includes an active price. So I think we feel good about that under the scenario that, you know, the backlog's cleaning itself out and we have the price increases in place. So I think that's good news for the back half.

Jay, sorry, one more on that detail. Can you remind us how much of those – I recall you guys saying it was like a $30 million to $40 million kind of one-time-ish type of cost related to supply chain, and then how big do you expect kind of that price-cost spread to be in the second half? Those two items, a little more precision there would be great.

Well, I mean, clearly it's going to be that headwind plus, right? So you mop up all the headwinds on a comp basis, plus you get normalized incremental margin on the volume.

Yeah, how big is that? Can you remind me?

I never told you, so there's nothing to remind you about.

Okay, thanks a lot. Appreciate the color. All right.

All right, thank you. Our next question will come from Scott Davis with Milius Research.

Morning, guys. Hi, Scott. I was hoping you could educate us a little bit, or me, I should say, on the biopharma business. When you think of, I mean, all these biosimilars that are coming out, there's just a shit ton of them. If I walked into one of those facilities, would it have similar asset intensity to kind of the predecessor product? I mean, I guess the question is, is that, are they more, just as likely to use single use?

Oh, boy. Well, like I tried to say before, we listened to Danaher because we knew this was coming, and I think that what they articulated was far better as, you know, we are a subcomponent supplier. What I will tell you is that skid production in biopharma is very much a growth avenue, right? It grew because of COVID. But now these MNRA therapies have got a variety of different therapeutic uses. And the chosen technology for production, in our understanding, is SCID. And as such, we are a component supplier to that chosen type of production.

All right. That's super helpful. And then to back up, the electric garbage truck, Is this, are there any specs you can share on it? Are there, is there, can you make money making these things? Are the specs, you know, are we a few years off from being able to actually, I'm just picturing like the battery density has to be massive to be able to drive these things more than, you know, 20 miles. So any color there that you can help just understand if that's a real market or not?

I don't know. Maybe you and I can go down to Waste Expo on May 5th and go take a look at it. Look, you know, I'll take a pass on that, Rick. I'll meet you there. I'll put it that way. We don't have a plane here, so I can't pick you up. Nonetheless, remember, we're not a chassis builder. So this is basically, if you think about a hybrid, this is a battery pack that drives the compactor that sits on the back of the truck. So the use is, in theory, a full electric vehicle, so you have a full electric truck with this technology sitting on the back, but you could also have a diesel chassis with an electric compactor. The guys that run this business are going to hate me for trying to describe it. And you get basically a hybrid benefit. So are we going to make money on it? That's the intent. But the fact of the matter is... For municipalities, you know, it's taxpayer money at work here. And if somebody decides they want to go to an electric fleet, they're going to go to an electric fleet. And as a material supplier, we've got to have a product offering.

Yeah, makes sense. All right. Thank you, guys. I'll pass it on.

All right. Thank you. Our next question will come from Joe Ritchie with Goldman Sachs.

Thanks. Good morning, everyone. Hey, Joe. Hey, Rich, just a quick clarification just on the 2Q comment. So we're talking about like-for-like EPS, right, organic growth. You know, it's going to be up, obviously, so margins down on a year-over-year basis, 2Q.

Yeah, look, I mean, I know, you know, we have all these discussions about price-cost, and what's ignored there is the dilutive effect on price-cost. Even at neutrality, it's dilutive to margins. So you're going to get that piece of it even if we were absolutely neutral across the entire portfolio and pricing has been robust. That's with the math. That's the way the math works at the end of the day. Now, our portfolio is so diverse, it's a little bit all over the place, and depending on how much commodity exposure we have in certain businesses and everything else, from an absolute profit point of view, I think because Q2 was – peak margins for, I'm going to get my years right now, 21. That's right. Even with that dilutive effect, an absolute profit, Q2 is a proxy. But I'd be careful about the margin.

Yep. No, that makes a ton of sense. I guess the follow-on there is really, I want to kind of parse out the clean energy and fueling margins this quarter. So clearly, we know the AD&A, the 400 basis points. Is So, I guess two questions. One, are we going to see the rest of the depreciation and amortization coming in 2Q? Is that going to be linear throughout the year? And then the second question, just maybe kind of help parse that a little bit more. I think you guys talked about like one week production being down in that business. And so, how quickly can kind of, you know, XDA, DNA, how quickly can margins come back?

Yeah, I'm going to leave the AD&A question to my colleagues. I'll deal with everything else, and we can circle back on the linearity.

Well, I mean, to answer that question, the back half goes to a linear amortization amount at roughly $7 million a quarter. So if you're thinking about the second quarter, it's not as high as the first because of the inventory rolls off into the second quarter. And we said it was 45 for the year, so you could do the math and squeeze the second quarter. And that's as simple as I can make it.

Okay. We'll endeavor to remove AD&A from the segments going forward. Our bad on that one. Nonetheless, look, Q1 was just a mess. You know, I don't want to go back and revisit COVID. But in January, at our main production facilities, We weren't doing much. We rushed like hell to pump out as much as we could, and we were actually on a pretty good pace, and then we lost a week of production in our main production facility, above ground dispensers, in March because of a hurricane. That's life. It should have happened in a quarter where we weren't taking $20 million of AD&A, I guess. And our clean energy business, which no one understood, and Understandably, no one understands the seasonality. Their actually lowest profit margin of the year is Q1, where we basically write orders for the balance of the year, so the backlog that we can see and the revenue trajectory that we can see for those business is very good, but is actually dilutive to prior year margins because of seasonality. So from here, all things supply chain being equal, Our below-ground business, which is very profitable, is booked, and our clean energy is all coming, and that's accretive to margins, and that is doing very well from a backlog point of view. So as long as we can get the product out the door, I'm confident that full-year absolute profit and margin performance will be robust, despite EMV.

Got it. Super helpful. Thank you both.

Thanks.

All right. Thank you. Our next question comes from Andrew Obin with Bank of America.

Good morning. Hi. Just a question on volume versus pricing. You know, in Q1, pricing was up 6%, and it sounds it's going to get better. So if we sort of look at the second half, if we look at the organic growth guidance, we take out sort of pricing. It plays relatively flat volumes in the second half. And given how robust orders and backlog is, just wondering, are you guys trying to gate growth in the second half to optimize profitability, right, given this dynamic between price-cost uncertainty, commitment to backlog, just trying to understand how to think about very robust backlog and volumes seemingly being flattish in the second half?

Yeah. I think that one could say that pricing that you've seen in Q1 remains linear over the balance of the year. And the margin accretion in the second half is because you flipped positive because of inventory evaluation. So if you follow me, meaning that pricing is in. As we cycle the older inventory that is valued higher, you've got in Q1, Q4 and Q1, it was dilutive. It gets to neutrality slightly positive, and then it flips all things, assuming we get all the product out the door, positive from there. So the growth rate for the full year, one could assume, is somewhere in the 5% to 6% price related, and the balance being volume. But as you know, mix here because of the diversity of the portfolio is going to be quite different, likely. Gotcha.

And then sort of the second question, how has, you know, European growth was surprisingly robust this quarter sequentially, you know, given all the news from Ukraine and You know, how has your view changed on Europe into the second half? And also maybe broadly, you know, are we sort of banking now more North American growth and maybe less Asia and European growth in 2022? So Europe specifically and be the sort of mix between North America and the rest of the world. Thank you.

Yeah, I mean, the economic environment in Europe is a risk. But we can only look The good news is that our backlogs in Europe are not as high as they are in North America, but they still remain good. And our expectation is that we would ship off that, but clearly we're going to watch order rates in Europe from here if one adopts a scenario of the demand function in Europe getting worse from here. Look, Andrew, I mean, we could think of a hundred other reasons to kind of tap down expectations for this year, whether that be, you know, what's going to happen with COVID in Asia, what's going to happen with the Russia, Ukraine, and Europe. You know, we're making, we're not assuming continued strength in the dollar versus some of our other trading currencies. But I think it's, you know, that would be a cop-out, and it's too early to tell here. You know, we're looking, the challenge for us is to get the product shipped profitably from here. And that is up to us on the productivity side, and it's up to us to work the supply chain things like crazy. But as I said in my prepared comments, we do this business by business, and we're on it, right, in terms of tearing apart order rates and making sure that we don't get over our skis from a working capital perspective or anything else. And we'll see how it goes. Right now, we believe that we can meet our forecast for the year.

I appreciate it. I also appreciate the burden of going early in the earnings season. Thanks a lot.

Thanks.

All right. Thank you. Our next question will come from Julian Mitchell with Barclays.

Hi. Good morning. Maybe just wanted to start off with imaging and IED, as I don't think that division has been touched on much yet. You took down the sales guide slightly, but had very good order growth actually in Q1 versus other businesses. So maybe help us understand on that revenue outlook, you know, how much is just that soft start to the year on sales. Also, there seems to be more conversation in your prepared remarks around component shortages in DII than perhaps what we've heard, you know, three to six months ago. So any color around that. And how do we think about the margins kind of flipping around there, maybe with those shortages eased?

I'll take the last one first. I think we said the margins are going to be stable on the full year. Look, we did have circuit board shortages in Q1, bad on us, and that was partially due by the fact that we sourced those from Asia, so the Asia lockdowns, and we had to shut our production factory, which is in Shanghai. during the quarter. So we'll pick up as much as we can out of there. To a certain extent, the geographical mix on that business is more levered towards consumer production in Europe. So we're being a bit cautious in the demand function. And again, I don't want to bring up this translation issue again, but that's part of it also. So overall, I mean, this is a business that grows Low to mid-single digits at pretty much constant margins, although I'll give the management team a lot of credit. Over the last couple of years, they've driven margins up nicely. Our expectation is here for this year, probably that kind of performance. Low single-digit growth at healthy margins and excellent cash flow. But it's going to be a little choppy based on macro and supply chain.

That's helpful. Thank you. There may be a question on inventories. You know, one more for Brad and one for you, Rich. But I guess, you know, Dover's own inventories, you know, you had the big working capital headwind. Free cash flow is very soft in Q1. How quickly does that reverse? And then maybe for Rich, you know, what we often hear from a lot of multi-industry companies is their own inventories are sky high. Their customer and distributor inventories are rock bottom. Maybe help us understand how you see that delta today regarding Dover.

Okay. You want me to take it first? Good. All right. Sure. Yeah. All right. We don't, as a portfolio comment, we do not believe that our inventories are reflective of our distribution network inventories, meaning pretty much what we ship out the door kind of passes through almost through distribution. Our inventories are high, clearly, but so is our backlog, right? So the way that we look at those inventories is before we – I'm just talking about physical inventory before we get into working capital. That's something else. But to the extent that we ship off that – we ship that backlog, which we have every intention of doing, that those inventories will moderate. And you also need to take into account that inflation has an impact on absolute dollar value of inventories, right? So, you know, it's very nice that we're – everybody's talking about raising prices and everything else, but that needs to be taken into account when you look at year-over-year change in inventory because the absolute dollar value of that inventory has gone up significantly.

And I think the only thing I would add is the – the sequence of cash flow is more like it's been in years past, which is, you know, fourth quarter being our highest quarter of cash flow, and we'll progressively pace through the year where we'll see free cash flow increase from Q2 into Q4. But again, I think, as Rich said, you know, and we said in the prepared comments, the balance sheet will have some liquidation to it in the sense of We had very high receivables because of the high shipments in March coming off of a low January. So just time-wise, the collection period falls into the second quarter. And then you also have inventory, which will continue, I think, to come down over the course of the year as we ship across the backlog.

That's perfect. Thank you. Thanks.

Thanks.

All right, thank you. Our next question will come from Josh Pokjawinski with Morgan Stanley.

Good morning, guys. Good morning. Hi. Rich, do you think you'll need any more price this year? I know there's been some lumpiness in some of the input costs, you know, particularly, you know, things like freight over the past 90 days, but maybe, like, freight surcharge aside, are you guys where you need to be on price?

Yeah. You should hear the yelling and screaming that goes on about pricing sometimes around here. I listened to the call at this point. I don't think so. I think that any pricing from here, especially on the capital goods side, is going to be surcharge and not absolute price. But we'll see. I mean, it's, you know, you tell me what the trajectory of inflation is going to be over the balance of the year. I mean, you know, that's one of the watch points. I mean, I think what good news, bad news on inflation is the way that we look at it is inflation looks to be moderating, except the fact that we've got a trillion plus of infrastructure and American rescue plan coming our way. Now, what does that mean? It's hard to say right now. I think the good news is, is that good from the demand point of view? In certain businesses of ours, yes, it is, right? Because we've got a big portion of our portfolio that's tied to CapEx. What does that mean from an inflation point of view? All bets are off there. So it's an interesting dynamic. So I guess to answer your question is, I think that we're going to be very selective from here. And if it's commodity price-driven, it's likely to be surcharge-based. Got it. Super helpful.

And then some nuance on the margin kind of expectations from here, especially with the traffic light commentary and the slide deck. Relative to where we were kind of coming out of fourth quarter, any change to how you see either the full year or the cadence in DEP or DPPS?

Well, I mean, look, that was the DPPS. Biopharma demand is probably intra-year going to be a bit light. So I think that nobody should fall out of their chairs if order rates go down there some. The balance of that portfolio is actually order rates are picking up quite nicely. Now, that's slightly dilutive to biopharma, but not to the extent where people saying that we're over-earning and we're going to go back to historical margins. So I think if you go back and Take a look at the transcript, I say that 30% plus is the new normal here, so we'll be able to absorb it. Where we're looking for, and it should make sense when you go back and take a look at the calendarization of earnings last year, where we're looking for absolute profit performance, 22 versus 21 is in engineered products, clean energy, and into the climate. side of the business. We're not looking for a lot of year-over-year incremental profit from the other two segments. There's going to be some, but that's not going to be the principal driver because, quite frankly, those two businesses more or less sailed through 21. Got it. Okay. Thanks. Thanks.

All right. Thank you. Our final question comes from Nigel Coe with Wolf Research.

Thanks. Good morning, everyone. Sorry, I dropped off for 10 minutes. So I apologize if I'm repeating any questions here. But your refrigeration margins, sorry, the clean, I can't remember the new name of the segment, but best margin since, one key margin since 2013. So curious, you talked about, you know, significant margin expansion this year in that segment. Just wondering, you know, do you think we're going to be in the mid-teen zone for that, for the full year?

Oh, for the segment? Sure.

Yeah, okay. And then, that's a nice quick answer there. And then, turning back to the fueling, sorry, I should know these by now, shouldn't I?

But the clean... Yeah, yeah, I know what you're talking about. Go.

You call out mix as a significant headwind there and obviously the weather impact on the production facility. Given the acquisitions of Rego and Acme, I thought they were like low 20s EBITDA margins rich. So just wondering, is there any seasonality to those businesses or was the mix impact elsewhere more than offset in that contribution from those acquisitions?

Well, you answered the question. Yes, there is seasonality in the acquired businesses. Q1 is actually the lowest margin quarter. So supply chain and COVID issues aside in Q1, what we expect is We roll out of EMV demand in Q2, which is probably the peak for EMV demand last year, which is margin accretive. But we basically offset that over the balance of the year and then some through the acquired revenue and profits and the fact that our underground business and vehicle wash and everything else start shipping significantly through the year. And that's against a comp in the second half of last year where it was weak.

Okay. And then maybe just one more question. We're getting a fair amount, not just for Dover, but across the group. U.S. CapEx. And just maybe this is a question for Brad. Are you, within your CapEx budget, are you shifting more CapEx into the U.S. relative to elsewhere?

No, not significantly, although CapEx is You know, in our growth-oriented businesses, if you think about the ones we're talking about that have the higher growth profiles, that's where the CapEx is. All right.

Thank you. This concludes our question and answer period and Dover's first quarter 2022 earnings conference call. You may now disconnect your line at this time and have a wonderful day.