BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - DOVER CORP

Alan with Baird here. Thanks for joining the Dover session. We've got Rich on stage, and we're going to talk through a bunch of things here. So if you've got any questions, raise your hand. No one ever does that anymore. But if you want to, raise Your hand, and We'll talk and make sure your questions are included. You can also send me an e-mail and make Sure it gets in that way. So, Rich, thanks for joining us today. Sorry you got caught in the elevators. That's all right. It's an annual tradition. You know what? It's not the same conference if we don't, right? That's right. So why don't we start high level here and just why don'T you give us your thoughts on how the cycle itself is playing out here? Durability, you know, investment coming back to the U.S. Any thoughts there? And we'll go from there. Playing out pretty much the way we expected it. Not perfect, especially when you have a portfolio as wide as ours. But just from a macro point of view, we expected North America to be good. It's good. We were hoping that Europe would be a little bit better. I would call Europe kind of flat overall, mostly, with these elections. I'm not sure if we're going to be able to do that in terms of how the economy is going to work. North America, I mean, I'm sure we'll get to it about, you know, it's still an inflationary environment. um so that's you gotta have to be nimble in terms of price and productivity and and everything and so far so good i think we've managed that quite well um i think that the capacity that we had laid in in certain product categories over the previous two years was um well done because it's allowed us to to gain share in a variety of the different product lines um that we have um so And then that's reflected in the top-line growth, and that's reflected in the book-to-bill and the backlogs and everything else. We're sprinting towards the end of the year and beginning our production plans and everything other than that. Everything else for next year. So far, so good. So how do you think about the durability of the growth? Less of a 27 comment, more of a multi-year comment. Yeah. You know, I think that That the AI build-out is sucking away, is inflationary? 100%. And so there's an argument to be made that if everybody's worried about the duration of the AI build-up, if that was to slow, A, does input inflation start to come down, which would be positive, and B, if, if the AI is sucking, then it's going to suck away. If that happens, then total costs come down, and then a lot of projects that are kind of in the I want to do them phase start kicking off. So we're not complaining about the AI buildup because we participated to a certain extent all the way through the power side of it. But it's clear that it is causing inflation just because of the amount of capex and the demand there. and that's probably making some other portions of the market a little bit more cautious and they're waiting for that to kind of roll off so you have the inflationary piece to it are you finding that the call it sucking in of all the labor into that is hurting the ability to push the projects and other areas as well yeah I mean it's tough finding labor in certain categories because it's because speed trumps cost in some of these big projects right now. So they're not exactly price sensitive to finding every welder that they can find, which pushes inflation, and to us also. So we've had, in certain product categories, a tough time finding people. And so we've Had to either through price or productivity offset that. What about the secondary tertiary impacts from the data center build-out, as well as policy decisions, et cetera, when it comes to the reinvestment cycle in the U.S.? I mean, I think you've mentioned before this is one of the first times in a long time you've actually seen facility reinvestments. Maybe talk to how that's playing out and how that is a positive. Well, I mean, the fact of the matter is, look, you've got the tariff-related onshoring, and then you've got some pretty good tax policy in terms of accelerated depreciation. So one plus one equals two here. And so we've been participating in that ourselves. So when you look, it's not income it basically the the tax policy on accelerated depreciation has offset all of the interest rate on cost of capital got it yeah so maybe talk about this in the context of your long-term growth you call it 20 of your portfolio that's in these very high and then you've got the other piece it's actually growing pretty well um maybe not the same seculars but still very good growth maybe put those two together and how you think about that in the context of your framework yeah i mean it's like your portfolio positioning is towards faster growth than maybe it was a few years back i hope so i mean that's the intent yeah um look and a and a on the run year we should do four to six top line growth so you know we're above that right now for a variety of different reasons but in a relatively stable economic cycle um that's what the portfolio can do and that's what our expectation is we just went through a we do a three-year strategic planning cycle every year we do roll forward and that's kind of what the numbers are kicking out right now you know it's not we haven't been historically we've been positive price cost but we've not but that spread has not been enormous so we haven'T been a huge price taker so we're not really overly concerned about running into a you know a headwind from that regard because if we're all want to see inflation come down that's great but then what does that mean in terms of everybody's pricing so you know we think we've got a pretty good handle on dealing with that going forward so our expectation in terms that four to six growth rate would be point and a half to maybe two of price uh in total so what are we underwriting at the end of the day then that's just three percent kind of organic volume growth and i think that's clearly something that the portfolio is capable of producing so where are you in that portfolio reshaping side of things you've obviously done you know a lot of push pull with kind of tuck in sales lately tuck in you know tuck in acquisitions one big one a couple years back you know where do you think you stand in that reshaping? In the last nine years, our net spending on M&A has been a billion dollars. So we've basically sold as much as we've bought. And that's why our return on invested capital is so high, is because we don't have a bunch of goodwill sitting up on the balance sheet at the end of the day. I would expect that to continue, but probably not as evenly balanced. but then it depends on what prevailing market conditions are. I mean, the fact of the matter is we would have liked to buy more this year, but prevailing multiples of the assets that became available were extremely high, and so we couldn't underwrite the return case for it. And so, you know, and I think we've mentioned it on the calls, that we came into the year with a 70-30 capital allocation bias of 70% M&A and 30% capital return. Well, that's clearly flipped itself, so our bias now is 70% capital returned and 30%, M&As, and that is because if anybody takes a look at our balance sheet, we're highly liquid, and we think the share price is undervalued. Yeah, we've been a little surprised at how big of a spread there seems to be between public and private multiples in the marketplace right now. Maybe your thoughts on that. Scarcity. That's it. I mean, everybody's waiting for all these so-called assets to come out of PE and everything else and they just go into continuation funds and they never come out. So if there's only three or four assets And generally speaking, corporate balance sheets are in very good shape. And you've got a lot of people chasing a couple assets. And that generally means lots of fees for investment bankers. Let's switch to the current backdrop then. Anything you're seeing in the current environment that suggests you can't see sustainability of current trend line in the next year? well i didn't see the cpi report but you know i guess it's okay i you know you know we've got to get north america's got to get inflation under control for sure right i mean it's um because that's a net negative and because if it can't get it under control then the fed's going to raise rates and then the cost of capital is going to go up and you know at a certain point, that has economic effects. I'm hopeful that with energy prices dropping, which is, let's not talk about the war, but just about the amount of capacity coming online, that that'll be de-inflationary in terms of input costs on the energy side, that maybe we can thread the needle here. But that's probably the biggest worry that we would have. But maybe let's flip that around then. the order trajectory itself is quite positive. Sequential revenue dynamics are quite positive maybe just talk to the pieces of the momentum into next year. Yeah I'm sure at some point next year we're going to have a negative order percentage comp and everybody's going to flip out right I mean that's generally what what happens when you go through an upcycle everybody's looking for whatever data point they can find you know clearly in certain product categories because of capacity constraints and supply-demand dynamics that lead times are spreading out or lengthening out, and at some point, they're going to start to come in, which means that orders are going to drop because they've already been placed. I'm sure that'll be the new dialogue once we get into next year when we start talking about the duration. I mean, I can already hear it in the rumbling in the background of the duration of the AI build and when is it going to go negative and when are the comps going to be bad just so we're clear here we're happy with the position that we have into the ai build i don't think that we're overtly long there by any stretch imagination um so i think that were like i said i think right now sitting here today after after going through about six weeks of an in-depth three-year rolling forecast across the entire portfolio that we think that next year has a very similar setup to this year yeah i mean the parts will be different but in total in aggregate a very familiar setup i have to feel confident though that the orders are out still out outpacing revenue growth and back i've seen october's orders and they're good yeah seems like a positive sign right um maybe talk about the uh margin piece and then we'll go to individual markets after that um you know what's the confidence in that margin as a starting point and then a bunch of questions from there um look on a stable macro we'll get to 25 yeah whether we get there at the end of 27 or the beginning of 28 you know lots of moving parts in there but we have a clear path to get it to 25. Yeah. Maybe talk about the investments you're making internally on the capacity side and then take that in both ways, right? What is doing for you from a margin perspective and then optimism internally. Our highest return on invested capital is capex so i mean everybody likes to talk about m&a but remember when you're buying 15 16 years worth of earnings when you do m&а but when we do capex sure there's a short-term drag during the build-out phase and the under absorption phase but if you get it right the returns on our organic capital are far superior there are than than even the best ones that we've done on m&ae so that's our, you know, we spend 80% of our time on that. So we've got four greenfield plants under construction right now, all behind the pieces of the portfolio that are growing, depending on the region and depending on that, we talked about why that, you now, because of on-shoring And because of tax treatment and everything else, those should be drive the top line and the returns on that capex should be good. I'm perfectly comfortable with taking the headwind during the build-out phase. I mean, let's talk about like brace plate heat exchangers because it's sexy because they go into data centers. we depressed our margins for a period of 24 months as we built out the capacity because we we were making a strategic bet that the volume was going to come right and now we i think we're probably five six hundred basis points higher in margin in that particular business because now the volume's coming and we're absorbing all that investment that we made so you know you got to be willing if you're making the bet the bets to take the the margin compression when you're when youre um investing organically we're doing the same thing in refrigeration right now i mean we're closing a plant in california we're dealing with a significant amount of transitory costs of doing it but when it's complete we believe that the margin lift that we're going to get is going to be significant so when was the last time you had four greenfield projects i mean plant buildouts as greenfield standalone plants in my tenure this is the first time all at the same time but we tend to do one or two a year yeah but having said that we went through a whole footprint restructuring period where we're actually taking plants out so net net we probably have less facilities today than we did when I first started because I think our bias was fixed cost reduction and productivity, which drove the margins early on. So we took a lot of plants out. And then when we built our business or when we bought our exposure into cryogenic components, I think that that was a total of 10 plants and we're down to five. And that was part of the synergy extraction on the M&A. So I guess the question there then is, are you viewing this as you got to the right baseline and now you're doing something to support growth? Or does this highlight the incremental confidence you have today and the growth of the portfolio? Yeah, I mean, in the legacy portfolio, this big plant that we're taking out of refrigeration is probably the last one, unless market conditions change. So now anything that we do on footprint is either going to be driven by supporting growth and or if M&A driven. Yeah. Yeah. That makes sense here. And then maybe switch gears to some of the end markets. Maybe talk to where you play in the cryogenics and gas side of things and the various points that make that a faster growth market for you in the short term. OK. We spent about a billion dollars building a position in cryogenic components. So these are highly regulated valves, vacuum jacketed piping, anything around kind of cooled gas, anything from CNG to LNG, you name it. So that's been doing really well because of the build out in LNG and CNG and propane as an energy source. So we've been doing quite well there. that particular technology also goes into space launch and that's been doing really well for us over the last year and a half also so that side we also are a material supplier to the internal components of both gas and steam turbines which i don't have to tell you has been doing quite nicely in terms of its growth rate and we are also a material supplier into natural gas compression that has been doing okay but it's one of the the mysteries in life of there's a lot of turbine orders but the but the pipeline construction to deliver the gas to those turbines is lacking we would have thought that we would have seen a lot more of that growth this year it looks like it's spilling into 27 and whether that's permit related or whatever hard to tell but just in terms of the energy complex those are our real two big exposures is kind of on the cryogenic component side and then on the internal components for turbines and compression and when you think about the biopharma medical piece all that sharp rebound how are you thinking about those end markets in the next year any change in the trend line um i think i think the growth will slow because we went through a period of you know big covid growth then the x covid collapse and then you had the inventory wind down and then you had this oh wait a minute there's no more inventory in the system anymore so here it comes out of the gates and grows like a weed which was great for us now i would classify this year is that is on the run consumption meaning inventory has been balanced it got balanced in in 25 the growth that we're seeing in 26 is just these are these are consumables yeah so it's just that's what the natural growth into the sector is right now what we're what we'RE printing now so i don't expect it to hopefully inflex more positive, but I don't expect that we've, that 26 is a reflection of that, a build back of inventory into the system. No, that makes sense. And then maybe more broadly in your pump segment, what are you seeing from a general industrial perspective or maybe the less exposed markets to some of those high growth areas? Are you seeing a rebound there that could be sustainable? It's steady, I guess, is how I would determine it. I think that unit volume is slightly up. I think there's a little bit of positive mix in there, and that is a segment that we can always get a couple points of pricing, a point and a half of pricing. So I'd call it steady, but not in kind of inflection of growth. And would you make that comment more broadly to the general industrial exposed areas of your overall portfolio? Um, it depends. I mean, in polymer processing, I think that that market has been down. This is year three. So we're actually lapping the end of that headwind there. It looks right now, knock wood, that quoting and order activity is beginning to improve. So, you know, hopefully Hopefully that becomes a tailwind in 27. The balance of the portfolio on the retail fueling side is doing great. We think that that, I think we called that at the beginning of last year to be a three year cycle. We can add another year to that three year cycle, so it's actually a four year cycle now, which is good. On printing an ID, business grows 2% to 4% every year. We've really done a, you know, the management team has really done a great job of margins, so those things, we're close to 30 now in that particular business, so that ends up being a cash engine for the group at the end of the day. And I think we talked about heat exchangers, sure, the rate of growth will slow. I mean, we're in the 40s right now, but we've got capacity coming online for another 20% capacity addition by the time we get done with it in mid-27. And then refrigeration is purely a margin story going into next year. Yeah. You mentioned the SWEP business, the heat exchangers. Maybe more broadly, talk about the data center semi-exposure you have in the portfolio. You know, you've gotten a little more with Socorro, right? You've built that out in a specialty way. It feels a little less CapEx tied, a little more run rate than some of the others, but still kind of some CapEx association. So how are you thinking about the dynamic there and durability? Yeah, I mean, the direct exposure that we have to data center is thermal connectors and in brazed plate heat exchangers. The ancillary exposure we have is on the energy side because what's driving a lot of the energy build-out is to feed the data centers at the end of the day. So, look, I think that we've been pragmatic about the capacity build. I thinkthat we've got a really good idea on the brazed plate heat exchanger side of the transition of the volume between the central's cooling systems and the CDU demand over time and how the volumes will change there. I don't think that we're going to run into a problem for overbuilding capacity. I think that, like I said, I think we've been pragmatic there. I think we've got some opportunity, potentially, of if the demand of cooling gets to the point where water is insufficient to cool and we move into cryogenic cooling, that's a position that we've already established that we talked about. So we're carefully looking around opportunities there. So what about fueling dynamics outside of some of the, you know, gas business we've talked to, more the traditional build out there seems healthy. You know, your customer base is expanding. How do you feel about that? Yeah, like I said, I mean, we thought we're in a three-year cycle. We've added another year to it. it's funny like sometimes when you have capacity constraints in the marketplace it actually lengthens the duration of the opportunity and that's kind of what we have at least in north america on the fueling side where you can't get the underground tanks so that has slowed the implementation of meeting those requirements and actually then actually that's good for us because we wouldn't want one of these, what we went through with EMV, where you get this one-year bubble and then the comps are bad and everybody loses their mind about it. So at the end of the day, and the market is pretty much a duopoly at this point, and so everybody behaves and the margin opportunity is actually quite good. Are you thinking about buybacks in the short term? You've obviously shifted or inverted the percentage you were expecting to do this year. Any reason that pace doesn't continue in the short term? No reason. And then on the AI side of things, you know, how's the internal implementation changed this year versus last year? And anything notable about where you're spending your time on that? Yeah, I mean, this is the big, everything that we've spent in AI this year, we've paid for with cost reduction because the early adoption for AI has been in coding. So we've played for all the tokens that we've created this year by reducing our headcount amount in programming. That is kind of the early-adoption, low-hanging fruit. Now we're going to get into the more complex applications, whether that be at the factory floor or in customer management and a variety of other things, I would expect our net spend to quintuple in 27. And we're working actively on ways to basically pay for it. So it's P&L agnostic. So you referenced earlier pricing. You weren't a huge price taker. You don't feel particularly worried about the ability to get some level of price in the next year. So fatigue doesn't seem to be an issue. Maybe more broadly, talk about how you're looking at price cost dynamics in the Next Year and your ability to kind of manage that push-pull. Yeah, well, I mean, I don't know where we are on copper today, but it's been quite the ride this year on commodity group metals. I think that we, Knockwood, made some good decisions about going long into this year, and that helped quite a bit. Look, at the end of the day, I think we'll have winners and losers as we go through the year, but net-net, I Think that we won't be negative price costs going unless something spectacularly strange happens. Last one, how do you think about inflationary versus deflationary optionality next year? If we get deflation, it's going to be because of energy cost, because that is an immediate reactive. The rest of it, even if the trend was to start to move lower on everything else, it will take 18 months on the way out, just like it took 18 months On The Way In. Gotcha. Please join me in thanking Rich for his time today.