Dover Corporation

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 Serapak, Senior Vice President and Chief Financial Officer, and Jack Dickens, Senior Director, 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, press star and then the number one on your telephone keypad. If you would like to withdraw your question, please press star 2. 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.

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.

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 that add attractive reoccurring and software revenue streams good growth exposures to our mix. We expect to close the Dosteco 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, BioPharm, but booked a bill, was above one, signifying an improving sentiment in the market, which is also evident in 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 off their 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, data center cooling, electrification of heating and 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 capital return strategies as we continue to upgrade the portfolio over time. Let's go to slide four. Consolidated organic revenue is 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 is 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. Let's skip to slide five. Engineered products at a solid quarter driven particularly strong volume growth and conversion in waste handling. Chassis availability improved through the quarter and the business has reservations from large national waste haulers and municipalities well into 2024. Europe and Asia shipments were notably lower in vehicle aftermarket, but bookings improved during the quarter. Margin performance improved 270 basis points on positive mixed benefits and volume conversion on recent productivity investments in the waste hauling business, coupled with a solid performance in aerospace and defense. Clean energy and 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 their robust growth, and above-ground fueling equipment was up on continued recovery in U.S. dispensers. 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 and ID posted another as projected stable quarter against a difficult comparable period with a high degree of reoccurring revenue and market and geographic diversity. In exposes 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 recent wins substantial reoccurring revenue contracts in remote monitoring and smart compressor technology. Top line performance in climate and 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, the 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, on 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.

Okay, thanks, Rich. Good morning, everyone. Let's go to slide seven. The top bridge shows our organic revenue decline of 3%. The acquisitions in FX translation contributed positive 1% to the top line in the quarter. FX resulted in a one-cent tailwind in the fourth quarter but remained a six-cent headwind for the full year, primarily driven by inter-year movements in the euro-dollar exchange rate. From a geographic perspective, the US, our largest market, was up 2% in the quarter, while Europe was down 16% on lower shipments and 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're 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 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 2024. With that, I'm going to turn it back to Rich.

Okay, I'm on slide nine. This highlights the results of recent investments behind several fast-growing platforms and portfolios. A few years ago, these were nascent product lines with about $50 million in combined revenue. We saw 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 and scale with customers. We are in the early innings of capitalizing on these investments and are excited about their 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 planned 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 seeking high confidence, high return on investment, organic investments, and we'll 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 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 compared to the time last year. We expect another year of solid free cash flow generation in 2024, with the added benefit of sale proceeds from Dosteco that should close at the end of February, the beginning of March. We have ample balance sheet capacity to continue improving our portfolio through accretive acquisitions or opportunistically return capital to our shareholders. Moving to slide 11 shows the long-term financial performance of the portfolio. Despite the top-line headwinds we experienced in 20 and 23 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, data center cooling, heating electrification, and cryogenic components. The near-term outlook for precision components remains strong as demand for infrastructure investment 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 work to replenish and upgrade their fleets. Based on recent history, we have incorporated appropriate caution in our forecasts for biopharma during the year, but we are confident that we'll post year-on-year growth in this end market and we'll update our view as the year progresses. Full year consolidated operating margin is forecasted to improve on volume, product mix, and productivity actions. We have 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 and markets. Our business model is flexible, and we can quickly respond to 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 a full year forecast. 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 ahead. And Jack, let's go to Q&A.

If you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star two. We ask that participants limit themselves to one question and one follow-up question. We'll take our first question from Andrew Obin with Bank of America. Please go ahead.

Yes, good morning. Good morning. Hi, Andrew. Just a question. Bookings have turned positive, I think, first time in eight quarters. How sustainable is this turn and how much visibility do you have in bookings staying positive?

I would expect the bookings 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 be biopharma and that 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.

That sounds good. And then just a question on biopharma. 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.

It's not a coincidence that we did this call behind some of our customers because we had been in front of them and 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, it said we were just going to update you where we are quarter by quarter. So I think that we're going to wait and see. What we can say is we do not expect it to be down year over year, but we have not incorporated anything, any meaningful amount of of operating profit up year over year. We'll keep that to ourselves until we see the orders.

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

You are absolutely correct.

Thank you.

The next question comes from Andrew Kaplowitz with Citigroup.

Good morning, everyone.

Hi, Andy.

Richard Baird, maybe you could give us some more color in how you're thinking about the 1% to 3% 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 return to pre-COVID seasonality, rich in a lot of your businesses. But is this year going to be more back and loaded given the turn and short cycle that's happening kind of now?

I think that it will start slowly. So I think that Q1 will be kind of a roll forward of what we saw in Q4 to a certain extent. But again, you've got some difficult comps. I would expect by Q2, you know, the vast majority of the accretion will occur in Q2s and Q3 as we ramp production into that. And then Q4 will be Q4 was

actually pretty strong for us usually 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 god that's helpful and then but you mentioned the intervening and 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 you know maybe heat pumps is an exception or heat exchanges for you guys and then Back to clean energy, do you see good demand in that business, or is it more in easier comparisons that should drive it in 24?

Well, there's a lot of moving parts of what's in clean energy. To back up for a moment, I think that the operating posture that we adopted as we moved through Q3 into Q4 was predicated upon of dropping production to flush the total channel inventory, and I think that we've accomplished that across the total portfolio. As you mentioned, I think what was not incorporated into our Q4 forecast was the sudden decline in demand on heat exchanges for heat pumps. Again, like BioPharm, I think that we're going to be very cautious about that for 2024 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 exchanges for heat pumps, I think that we're in pretty good shape in terms of balanced 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.

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

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 and we see what all our customers say about heat pump demand for 2024. Very helpful.

Thank you. You're welcome.

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

Hey, guys. Good morning. Hey, Scott. Hi. Thanks for being brief with your prepared remarks. I really wish everybody would get that memo. It's helpful to get to the effing point, as they say, and get to Q&A, and let's all move on. Guys, a couple things caught my eye. You know, one, kind of the volatility geographically, you know, 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, you know, maybe some puts and takes on some of the geographic moves. You know, I'll just stop there and open it up.

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 a big shipment into China out of polymer processing, it swings the numbers. So the base business, the remaining base business that we have in China is a reflection of the Chinese economy. It's not great, but it flexed up because of that. Europe is... Really a couple things. Well, first of all, the European economy is not great, but it's been exasperated in the quarter by a sudden shift down in demand in heat exchanges or heat pumps where we went from an operating posture of selling absolutely everything we could make to selling hardly anything at about mid-September. So I think there was a market-wide recognition that inventory got over their skis a little bit, so that needs to clear. So what was 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 America driven.

Okay, that makes a lot of sense. So, Rich, I think you started off, you know, the last couple quarters you've made increasingly more kind of tonality, positive remarks on M&A. This may be hard to answer, but kind of what does good look like? You know, if 24 is a good year for M&A, is there 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?

I understand the question. Look, at the end of the day, the reason that we put the one slide together in terms of firepower, it was an odd 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, you know, 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 – significantly better just on pure cash and 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 look like that would we like to do something bigger sure but you know we've got some return hurdles that are If we can't find something with 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've 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.

Fair enough. Best of luck this year, guys. Thank you. Thanks. Thanks.

The next question comes from Mike Holleran with Baird. Good morning, everyone.

Hey, Mike. Jay, just tying 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 the numerous businesses you have?

I don't think that we're getting over our skis in terms of At the end of the day, we've got one to three in top line. Now, taking to that one to three is we've got a small amount of dilution because we sold to Staco versus what we brought into the portfolio. I think from an earnings point of view, that neutralizes itself, but not from a top line point of view when I take a look at the math. 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 coming, and that's why we've been investing in a variety of other portions of the portfolio to cycle up, and we take a look that we had, you know, a couple footfalls last year that we don't expect to repeat. So net-net... The underlying growth is higher than 1.3 because we're incorporating the headwind that 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've invested. We should try to highlight on that page. We've got a 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's 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, hey, gee, you know, the Fed's going to drop interest rates and GDP's going to expand.

Yeah. I guess what I would add to that is Unlike, like, we've been pretty vocal about the fact that, you know, 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 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.

Helpful. It makes a lot of sense. And then when you think about the pumps business, the industrial pumps piece, maybe just talk about what you're seeing underneath the hood on that side, trajectory, order trends, et cetera, and how you're thinking about that for the year.

It's decent. The industrial pump side never really had the kind of headwind in terms of stocking and destocking. 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. Right.

Makes sense. Thanks, guys. Appreciate it.

Thanks. Yep.

The next question comes from Steve Tusa with J.P. Morgan.

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

Price is about a point to a point and a half. And on volume, I think, roughly the same thing. So 50-50, roughly. Yeah, it's a point, a point and a half. And so it's 50-50 on price volume. And I think that we've done the hard work because of what the argument of against price is inventory balances. And I think that The 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 a good setup there. So right now all we need to do is toggle production with orders at this point.

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

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

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 margins?

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

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

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 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 of where we stand on Q4. But I think that we put in all the caution that we can just in terms of the macro. Our fundamental forecast is basically what we think is The volume is going to be bi-vertical here, so we think that we can hit these numbers. And if we get a better macro or we get, you know, biopharma or return on some amount of HVAC, then we're ready to go. But we prefer... We'd prefer, rather than trying to lead that like we have over the last couple of years and speaking to those end markets, you know, it's more of a show me. When it comes, we'll create our forecast.

Yeah, and on those two businesses specifically, we're talking about Schwepp and CPC, when the volume does come, they do convert. Right. And the mix is up. So, you know, that's the good news. Great. Thanks a lot.

Thanks.

The next question comes from Joe Ritchie with Goldman Sachs.

Hey, guys. Good morning.

Joe?

Hey. So, Rich, a lot of discussion around your portfolio these days. Just be curious, you know, what you'd like to share about, you know, the potential to unlock value, you know, by divesting some of the pieces of the portfolio. Any comments you'd like to share there would be great.

I mean, we're committed to managing the portfolio I think, you know, we sold to Staco, I think, at, you know, a pretty good price in 2023. We've just – we've closed three acquisitions over the last five months where I think our 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 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, which we can 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. Let me put it to you that way.

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

Well, I mean, the headline figure... At 1 to 3, you need to take into account that we know where we have cyclical headwinds going forward, right? So we had banked significant profits out of polymer processing and can-making equipment that we knew this headwind was coming. So in that 1 to 3, we're making all that up. We've got a bit of a headwind in terms of the disposal of Destaco coming out, that the acquisitions, I think from a profit point of view, neutralizes it, but not from a top-line point of view. And then I think that we've, you know, 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.

Okay, good enough. Thanks, guys.

Thanks.

The next question comes from Jeff Sprague with Vertical Research.

Hey, thank you. Good morning, everyone. Hey, Rich, just back to capital deployment. If I think about what you've laid out in the guide here today, is there any prospective capital deployment on share repurchase or deleveraging or anything like that in the numbers?

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

And then on your slide 10, right, I mean, you do have two segments that are net negative M&A. I mean, does this kind of inform where we're headed over time? You know, there's GEMS and DCST obviously with CO2, but, you know, should we take that chart at face value on where you're, you know, how you're thinking about reshaping the portfolio?

Well, that chart actually foots to the chart that we put out in 2020 in terms of the hierarchy of capital allocation to a certain – well, I think that DPPS and DCEF kind of flipped, but that – because you can't control in terms of closing acquisitions. Yeah, I mean, overall, yes. I mean, if you think that engineered products outside of defense has been an organic – issue for us for some time. And DCST, you know, Belvac and Swep are organic. And I think in refrigeration, I think that what we've done with the total investment, that would be an organic play also. So yeah, I think that the hierarchy there, they may flip around a little bit, but it's largely correct.

Okay. And just back on the orders, Rich, that strength in the public process orders in the quarter, was that all bio, or did something else notably pick up in there?

I think it's broad-based, and I think it's more influenced by, what do we call them, the thermal connectors.

Great. Thank you. Thank you very much.

The next question comes from Julian Mitchell with Barclays.

Hi, good morning. Good morning. Good morning. Maybe I just wanted to start with the operating margins. So I realize you're not giving a sort of firm-wide 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 and a half points. Price-cost is broadly neutral. M&A and divestment 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 all those moving parts, sort of biopharma stable, heat pump down, polymer and can down, maybe fueling up. In aggregate, is there much of a mix impact, do you think, on margins in your guide?

Well, you touched on them all, Julian. Yeah, I mean, look, we cut production in DCF to manage inventories. So that is not just the lost products that we sell. 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 balance production, that that returns. engineered products really the bulk of the margin accretion in 23 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 so that's helpful DII what do we close at 25% margins that's great so that's more a revenue issue for us DPPS has had a biopharma headwind now for two plus years what we're calling here is it's no longer a headwind and whatever we get on the top side which we're not baking in a lot right now or hardly anything is going to be accretive and the DCST has got Right now in our forecast would be margin down on mix because Belvac, 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. The headwind will be less than we've got modeled into our forecast for the year.

That's very helpful. Thank you. I just wanted to follow up when you were talking about some of the quarterly earnings trends. So do we assume sort of Q1 earnings or EPS is, you know, 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. Q1 will be more of a reflection of the carry forward of Q4. What we'll get is some amount of production ramp, but a lot of bad comps, and then we accelerate right out of there.

That's great. Thank you.

You're welcome.

The next question comes from Nigel Koh with Wolf Research.

Thanks. Good morning. We've covered a lot of ground, and Rich, you clearly don't want to give too much cover on margins, but I just wanted to have another crack here. Clearly, margin leverage is a big driver of earnings this year. Maybe just talk about what he baked in for structural cost savings. I know we've got some roll forward from some of the actions he took in 23, but maybe just itemize any other significant cost actions he's taken driving margins in 24.

Yeah, if we 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're not fully baked. But we do have a list of cost actions which are more of a revenue edge. So if we take those actions and we're right on the demand profile, 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're working on the timing in terms of the execution.

Okay. Okay. And then on pricing, you've been very successful in pushing price. I mean, I think we've all been, you know, a little bit nervous about some of the more raw material sensitive, you know, businesses, Web, Hill Phoenix, and maybe parts of ESG as well. But it sounds like your customers are forecasting, you know, inflation on their components, specifically within the HVAC end markets. So just curious, you know, what you've seen in terms of pricing power across the portfolio in 2024, specifically within some of these more raw material sensitive end markets?

Yeah, it's interesting. I mean, if you go back and look at our realized pricing, and I'm talking about the price of 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 – of what is capable in pricing. And so if we look at some of our end market customers and what they've passed through on pricing, I guess that we've been jealous, for lack of a better word. So to us, it's been we've, you know, I don't want to be negative. I think we've taken some price. I don't feel that we've got a couple businesses that have, escalation de-escalation 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 has always been that the way to defend pricing is not to get over your skis and inventory, and that's why we took it into the neck 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.

Great. Okay, thanks, Rich.

You're welcome.

Our final question comes from Dean Dre with RBC Capital Markets.

Thank you. Good morning, everyone. Thanks for fitting me in.

Thanks, Dean.

Hey, 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 in like a year and a half. So at 52.5. But any puts and takes from your perspective there?

You know what? 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 the month yet, Dean. But I'm unaware of it being worse than what we have baked in.

All right. Good to hear. And then just a quick question. Data center cooling came up a couple 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's a big investment cycle starting. I mean, it's more than 30% growth in liquid cooling side. Will you participate in that?

It's almost exclusively levered towards liquid cooling.

Yep. And you're not tied to a particular vendor. You're a component supplier for that. Is that correct?

That's correct.

Yeah, when we say thermal, we mean liquid cooling and data centers. That's great.

Yeah, we supply everybody.

Thank you. So it's not just heat exchangers. It's connectors, too. Understood. Yep.

Is that it?

Thank you. That concludes our question and answer period, and Dover's fourth quarter and full year 2023 earnings conference call. You may now disconnect your line at this time and have a wonderful day.