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 Cerepak, Senior Vice President and Chief Financial Officer; and Jack Dickens, Senior Director, Investor Relations. After the speakers’ remarks, there will be a question-and-answer period. As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consensual 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 our 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 am on slide three, which shows the detailed U.S. 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 our expectations. The demand for products and service continues 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 next slide. 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, with book-to-bill above 1 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 of supply chain constraints and negative price costs embedded in older orders and 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 recover over the balance of the year. During the quarter we continued 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 WasteExpo in May. Our first quarter performance demonstrated again the strength of our diversified portfolio of businesses and our commitment to continuous improvement in operational rigor. Due to the dynamic environment in which we are operating, quarter-to-quarter results will be noisy, which I am sure we will discuss at length during the Q&A. But keep in mind that we have a robust backlog and that the businesses that faced 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 7% to 9% organic growth and adjusted EPS of $8.45 per share to $8.65 per share. Let’s go to slide five. Engineered Products revenue was 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 a 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 backlog shipped. We expect this dynamic to continue through the balance of the year. Clean Energy & 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, below-ground and fueling components. Let me unpack the margin performance here before we make this an EMV-only story and draw the wrong conclusions about 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 is a 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 & ID declined 1% organically as volumes in our core marketing and coding business were constrained by component shortages, as well as China lockdowns and reduction of business in Russia, which more than offset growth in our serialization and brand management software businesses. Digital textile printing continued its gradual recovery. Q1 margins in Imaging & ID were down due to lower volumes and higher input costs. Pumps & Process Solutions posted another strong quarter at 13% organic growth. We saw strong volumes across all businesses and geographies. Demand remained strong in core biopharma activity where drug R&D projects, which were sidelined during COVID, came back strongly. But we did see normalization in 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 mix in pricing. Topline results in Climate & Sustainability Technologies continued to be robust, posting 17% organic growth and strength across all businesses in 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 will 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 $0.05 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 topline 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 seven. Adjusted segment EBIT was down $7 million in the quarter and adjusted EBIT margin declined 200 basis points as improved volumes, 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 robust growth expectations across several businesses. Q1 is our seasonally lowest cash flow quarter and Q1 last year was a bit of an outlier due to post-COVID recovery. With that, I am going to turn it back to Rich.

Okay. I am on slide nine. This slide includes our current view of demand outlook, operational environment and margin drivers for the remainder of 2022 by segment. We expect topline in Engineered Products to remain robust, based on solid backlogs and sustained strong bookings. Vehicle services continue 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 margin cost volatility in our Capital Equipment businesses. All-in, we expect margins to improve sequentially as the year progresses. We expect Clean Energy & 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 incurred in Q1, we expect full year margins to improve on volume and mix. Demand conditions in Imaging & ID are expected to remain solid as component shortages in core marketing and 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 in Pumps & Process Solutions remained 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 MRNA vaccine production to alternative therapies. Subject to year-to-year shifts in mix, we expect 30% plus margin in this segment as the new normal going forward. We expect Climate & Sustainability Technologies to post double-digit organic growth this year driven by its large backlog in 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 businesses positioned well on strong order rates across all geographies and end markets. The 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 sequentially. Okay. Here we go. This is the new slide and I am going to attempt to provide some clarity on bookings and backlog by segment, since this subject has been actively debated and I can see it 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 growth in the quarter. This is a very good picture. Topline visibility is a great thing from an operational and planning perspective, and it’s an important pillar of our full 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 pricing. And second, customers expecting robust demand in 2023, while remaining 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 will 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 am absolutely confident that we have the tools to maximize profitability in the upside scenario and to protect it in the downside as we proved 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 are reaffirming full year guidance for the year. And let’s move on to Q&A.

Operator Instructions. Our first question comes from Jeff Sprague with Vertical Research Partners.

Thank you. Good morning, everyone.

Hi, Jeff.

Hi. Good morning.

Hi. I have a couple of questions. First, Rich, you seem to be more confident about price costs for the rest of the year. You also mentioned that the older backlog is being processed. I'm sure you have a good understanding of that, but could you elaborate on the ongoing challenges with converting the existing backlog and the measures you've taken to mitigate volatility in cost inputs moving forward?

Sure, Jeff. Last year, we were focused on managing price costs, and having a strong backlog provided us with visibility that aided our planning. However, the downside is that if the backlog grows ahead of rising input costs, we start to fall behind. Without replacing backlog, we faced negative price costs, which we experienced in Q4 last year. As I mentioned earlier, our disappointing performance in that quarter was primarily due to supply chain issues. We were unable to convert as much backlog as we had hoped, which affected our revenue and margins negatively in Q4. We have carried some of those challenges into Q1, and our modeling for Q1 this year indicated it would closely mirror Q4 of last year, which has proven to be accurate. We are now working through the older backlog, and we expect to see a significant improvement in price costs in Q2, followed by a notable positive shift in the latter half of the year, particularly in Engineered Products, Clean Energy, and Climate, where we anticipate significant benefits due to easier comparisons. Last year in Q2, we achieved the highest margin in Dover's history, making the upcoming comparison challenging. I would highlight Q2 of last year as a benchmark for our expected performance this year.

Great. Thanks for that. And maybe just a little bit of macro color for lack of a better term, I guess. But, obviously, the world feels different the last six weeks or eight weeks. I mean the backlogs and orders do look robust. But are you seeing any indication, trepidation from customers about taking backlog or 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 how my top concerns point of view, this China COVID situation is new news in the quarter that we have had to navigate here. I don’t have a view on where this goes. I am hoping, based on the news this morning that we are 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 have 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 or does it get worse from here? We will see. From our customers’ point of view, they again are dealing with supply chain issues and labor availability issues. So that’s where you have got a lot of push and pull of, we are working really hard to get the product out the door and we are working really hard with our customers to make sure they are ready to receive at the same time, because they are dealing with their own 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 will see going from here.

Great. I will leave it there. Thanks for the color. Thank you.

Thanks.

And thank you. Our next question comes from Andy Kaplowitz with Citigroup.

Hi. Good morning, Rich.

Hi, Andy.

So DPPS, obviously, book-to-bill is still positive, orders did turn down on tough comps, and it looks like you have lowered your 2022 revenue forecast slightly in that segment and you called biopharma, I think, lumpy. Can you give us some 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 Dover’s overall ability to grow DPPS at this point?

I think we are going to experience a slight dip in demand as we shift from COVID therapies to non-COVID therapies. In the long term, we believe this is a growth market, and I appreciate Danaher for explaining it better than we could. We expect to see a decrease in order rates in the middle of this year as this transition occurs, and we have factored that into our earnings forecast for the year. However, I don't see this COVID-related situation as a significant drop in revenue that will never recover. We view it as a temporary adjustment within the year, and we are confident about our position in single-use products.

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

The two-year compound annual growth rate for Belvac is now in the 40s, while for heat exchangers it is in the 20s. Before moving on to refrigeration, it's important to note that these two areas are significant drivers, positively affecting the segment's margins. The two-year compound annual growth rate for the refrigeration business is approximately 16.5 to 17, with growth seen across the portfolio, particularly in the systems business, which is the fastest growing part. As previously mentioned, we intend to take on as much systems business as possible while maximizing profitability on the case business, which means we are selective about the business we pursue. So far, things are progressing well despite ongoing supply chain challenges due to the complexities of the assembly processes, but the margins for the second and third quarters are expected to be intriguing.

I guess I will leave it at that. Thanks, Rich.

And thank you. Our next question comes from Steve Tusa with J.P. Morgan.

Hi, guys. Good morning.

Good morning.

Good morning.

Can you clarify what the organic growth is expected to be in Q2, considering that it will resemble Q2 of last year? There was a significant increase in Q2 last year, so perhaps it will be similar or even exceed that?

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 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. Trying to do less work these days, looking for a little help there.

Right.

So that suggests that in the latter half of the year, we might expect growth in the range of 6% to 7%. If that estimate holds true, it would indicate an incremental growth of approximately 45% to 50% for the second half of the year.

Well, the back half of the year, the incrementals are going be significant because the comps with all the operational difficulties that we had last year, I mean, we lap all that.

Right?

We are shutting down facilities and we had negative absorption. We had reduced volumes, negative absorption, everything else, and the beginnings of negative price costs. So 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…

Yeah.

I would add to that, I guess, to say, we will 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 include impacted price. So I think we feel good about that under the scenario that the backlog is cleaning itself out and we have the price increases in place. So I think that’s good news for the back half.

Could you provide details on the one-time costs related to supply chain that you mentioned, which I recall were around $30 million to $40 million? Also, how significant do you anticipate the price-cost spread to be in the second half? More precision on these two items would be appreciated.

Well, I mean, clearly, it’s going to be that headwind plus. So you mop up all the headwind 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 there.

Okay. Thanks a lot. Appreciate the color.

All right.

And thank you. Our next question will come from Scott Davis with Melius Research.

Good morning, guys.

Hi, Scott.

I was hoping you could provide some insight on the biopharma business. With so many biosimilars emerging, I wonder if the asset intensity of the facilities would be similar to that of the predecessor products. Also, are they just as reliant on single-use systems?

We recognize that Danaher has provided valuable insights into the situation ahead of us, and we anticipate a decrease in order rates around the middle of this year as we navigate this transition, which has been factored into our earnings forecast for the year. However, I do not think this COVID-related issue represents a permanent decline in revenues. Instead, we view it as a temporary fluctuation within the year, and we are confident in our position regarding single-use products.

That’s very helpful. To clarify about the electric garbage truck, can you share if it’s possible to profit from producing these vehicles? Are we still a few years away from being able to achieve this? I'm imagining that the battery capacity needs to be significant to drive them over 20 miles. Any insights you can provide would help us understand if this market is viable.

I don’t know. Maybe you and I can go down to WasteExpo on May 5th and go take a look at it. Look, we are not…

I will take a pass on that, Rich.

I will meet you there.

Let’s put it that way.

Yeah. We don’t have a plane here, so I can’t pick you up. Nonetheless…

Yeah.

Remember, we are not a chassis builder. So this is…

Yeah.

Essentially, a hybrid system utilizes a battery pack that powers the compactor located at the back of the truck. This allows for the operation of a fully electric vehicle. You could have a completely electric truck featuring this technology, but it could also function on a diesel chassis with an electric compactor, resulting in hybrid advantages. Will we profit from this? That’s the goal. However, municipalities are using taxpayer funds, so if they choose to transition to an electric fleet, they will do so, and as a material supplier, we need to have a suitable product available.

Yeah. Makes sense. All right. Thank you, guys. I will pass it on.

Thanks.

And thank you. Our next question comes from Joe Ritchie with Goldman Sachs.

Thanks. Good morning, everyone.

Hi, Joe.

Hey. Rich, just a quick clarification just on the Q2 comment. So we are talking about like-for-like EPS, right, organic growth? It’s going to be up, obviously, so margins down on a year-over-year basis 2Q?

I understand that there are ongoing discussions about price and cost, but what's often overlooked is the dilutive effect on margins. Even when prices stabilize, it still negatively impacts margins. This is a part of the equation, even if our portfolio remains completely balanced. Pricing has been strong, and that's the reality we face. Our portfolio is quite diverse, and the level of commodity exposure varies across different sectors. From a profit perspective, considering that Q2 in 2021 represented peak margins, it's important to recognize that even with the dilution, Q2 serves as a good benchmark. However, I would urge caution regarding margin expectations.

That makes a lot of sense. I want to focus on the Clean Energy & Fueling margin this quarter. We know the depreciation and amortization, the 400 basis points. I have two questions. First, will we see the rest of the depreciation and amortization in Q2? Will it be linear throughout the year? Second, could you explain a bit more? I believe you mentioned that production was down for one week in that business. How quickly can we expect the margins to recover excluding depreciation and amortization?

To answer that question, the back half goes to a linear amortization amount at roughly $7 million a quarter. So if you are considering the second quarter, it’s not as high as the first, because of the inventory rolling off into the second quarter, and we said it was 45 for the year, so you can do the math and estimate the second quarter, and that’s as straightforward as I can make it.

We will work on removing AD&A from the segments in the future, and we acknowledge our oversight. However, Q1 was quite challenging. I don’t want to rehash COVID, but in January at our main production facilities, operations were limited. We worked hard to produce as much as we could and we were on a decent pace, but we lost a week of production in March at our main facility for above-ground dispensers due to a hurricane, which is just part of life. Ideally, this should've occurred in a quarter when we weren't taking on $20 million of AD&A. As for our Clean Energy business, it's not widely understood, and understandably so given the seasonality involved. Q1 is typically their lowest profit margin quarter, as we place orders for the rest of the year during this time. The visible backlog and revenue trends for those businesses are promising, but they negatively impact margins compared to the previous year due to seasonality. Moving forward, assuming supply chain conditions remain stable, our profitable below-ground business is booked, and the Clean Energy segment is developing well, which will enhance margins. If we can manage to get the products out, I am optimistic that overall profit and margin performance for the year will remain strong despite EMV.

Got it. Super helpful. Thanks. Thank you both.

Thanks.

And thank you. Our next question comes from Andrew Obin with Bank of America.

Good morning.

Hi. Thanks.

Well, just a question on volume versus pricing. In Q1, pricing was up 6%, and it sounds like it’s going to get better. So if we sort of look into second half, if we look at the organic growth guidance with a powered sort of pricing, it implies relatively flat volume in the second half. Given how robust orders and backlog are, just wondering are you guys trying to gauge growth in the second half to optimize profitability, like, given this dynamic between price cost uncertainty to the backlog? Just trying to understand how you 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 have seen in Q1 remains linear over the balance of the year and the margin accretion in the second half is because you flip positive because of inventory valuation, so if you follow me. Meaning that…

Yeah.

Pricing is established. As we work through the older inventory that is valued higher, the impact in Q4 and Q1 was dilutive. It reaches neutrality, becomes slightly positive, and then turns positive overall, assuming we successfully move all the product. Therefore, one might estimate the growth rate for the full year to be around 5% to 6% related to price, with the remainder coming from volume. However, the mix is likely to be quite different due to the portfolio's diversity.

Got you. For my second question, European growth was unexpectedly strong this quarter despite the situation in Ukraine. How has your perspective on Europe changed for the second half? Additionally, should we expect more reliance on North American growth and potentially less from Asia and Europe in 2022? What is your specific strategy regarding the balance between North America and the rest of the world? Thank you.

The economic situation in Europe poses some risks. However, our backlogs in Europe are not as significant as those in North America, yet they remain solid. We expect to ship from these backlogs, but we will closely monitor order rates in Europe, especially if demand worsens. There are numerous potential factors that could dampen expectations this year, such as COVID developments in Asia and the situation between Russia and Ukraine. We are not assuming the dollar will maintain its strength against other currencies. That said, it's still too early to make definitive judgments. Our challenge lies in shipping products profitably, which depends on our productivity and effectively managing supply chain issues. As I mentioned earlier, we are analyzing this on a business-by-business basis to ensure we manage working capital properly. For now, we are confident in our ability to meet our forecast for the year.

Well, great. I appreciate that. I also appreciate the bookings early in the earnings season. Thanks a lot.

Thanks.

And thank you. Our next question will come from Julian Mitchell with Barclays.

Hi. Good morning. Maybe just wanted to start off with Imaging & ID, 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, how much is just that soft start to the year on sales. Also, I think, there would be more conversation in your prepared remarks around component shortages in DII than perhaps what we have heard three months to six months ago, so any color around that. And how do we think about the margins kind of flipping around there may be as those shortages ease?

Well, I will take the last one first. I think we said that 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 in Shanghai during the quarter. So we will 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 are 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 will give the management team a lot of credit, over the last couple of years, they have driven margins up nicely. Our expectation for this year is 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. And then maybe a question on inventories, one more for Brad and one for you, Rich. But, I guess, Dover’s own inventories, you had the big working capital headwind, free cash flow was very soft in Q1. How quickly does that reverse? And then maybe for Rich, what we often hear from a lot of multi-industry companies is their own inventories are sky high, their customer distributed inventories are rock bottom. Maybe help us understand how you see that delta today regarding Dover?

Sure. I'll go first. As a comment on our inventory, we don't think our inventories represent what's in our distribution network. Essentially, what we ship out typically goes through distribution. While our inventories are high, so is our backlog. When we discuss these inventories, I'm referring specifically to physical inventory before we consider working capital, which is a separate matter. Assuming we fulfill our backlog, which we plan to do, those inventories will decrease. Additionally, it's important to remember that inflation affects the total dollar value of inventories. While it’s great that everyone is talking about raising prices, this factor must be considered when analyzing year-over-year changes in inventory because the overall value has increased significantly.

I would like to add that the cash flow sequence resembles that of previous years, with the fourth quarter being our strongest quarter for cash flow. We expect free cash flow to progressively increase from the second quarter to the fourth quarter. As Rich mentioned, and as we noted in our prepared comments, the balance sheet will experience some liquidation due to high receivables stemming from a significant amount of shipments in March following a lower volume in January. Consequently, the collection period falls into the second quarter, and we anticipate inventory levels will decrease throughout the year as we fulfill the backlog.

That’s perfect. Thank you.

Thanks.

And thank you. Our next question comes from Josh Pokrzywinski with Morgan Stanley.

Hey. Good morning, guys.

Good morning.

Hi.

Rich, do you think you will need any more price this year? I know there’s been some lumpiness in some of the input costs, particularly 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 listen to the calls, there’s plenty.

I don’t think so. I believe that any pricing changes moving forward, particularly in capital goods, will be based on surcharges rather than fixed prices. We’ll have to see how it unfolds. If you can predict the inflation trajectory for the rest of the year, that's one key factor to watch. The mixed news on inflation is that it seems to be cooling down, but we also have over a trillion dollars from infrastructure and the American Rescue Plan heading our way. It’s difficult to assess the implications of that at this moment. However, it could be beneficial for demand in certain sectors like ours, especially since a significant part of our portfolio is linked to capital expenditures. The impact on inflation is uncertain, so it's a complex situation. To respond to your question, I think we’ll be very selective going forward, and if there’s a change in commodity prices, 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 in the slide deck. Relative to where we were coming out of the fourth quarter, any change to how you see either the full year or the cadence in DP or DPPS?

Well, I mean, look, that was in, perhaps, DPPS, like, 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 are saying that we are over earning and we are going to go back to historical margins. So I think if you go back and take a look at the transcript, I’d say that 30% plus is the new normal here. So we will be able to absorb it. Where we are looking for and it should make sense when you go back and take a look at the calendarization of earnings last year, where we are looking for absolute profit performance, 2022 versus 2021 is in Engineered Products, Clean Energy and into the Climate side of the business. We are not looking for a lot of year-over-year incremental profit from the other two segments. There’s going be some, but that’s not going to be the principal driver because, quite frankly, those two businesses more or less sailed through 2021.

Got it. Okay. Thanks.

Thanks.

And thank you. Our final question comes from Nigel Coe with Wolfe Research.

Thanks. Good morning, everyone. I apologize for missing the last 10 minutes, so I might repeat some questions. Regarding your configuration margins, I can't recall the new name of the segment, but it has the best margin since the first quarter of 2013. I'm curious about the significant margin expansion you've mentioned for this year in that segment. Do you think we will stay in the mid-teens range for the full year?

Oh! For the segment? Sure.

Yeah. Okay. And that was a nice quick answer. Now, regarding the Fuel, I should know these details by now, but the Clean...

Yeah. Yeah. I know what you are talking about. Go.

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

Yes, there is seasonality in the acquired businesses. The first quarter is the lowest margin quarter. Despite supply chain and COVID issues in the first quarter, we anticipate that the rollout of EMV demand in the second quarter will be the peak for EMV demand compared to last year, which is beneficial for margins. We expect to offset this over the rest of the year with the revenue and profits from the acquisitions, as well as the increase in shipments from our underground business and vehicle wash, particularly against a weaker performance in the second half of last year.

Okay. One more question that we've been receiving often, not just for Dover but across the group, is regarding U.S. CapEx. Brad, are you reallocating more CapEx to the U.S. compared to other regions within your budget?

No, not significantly, although capital expenditures are present in our growth-oriented businesses, particularly those with higher growth profiles. That's where the capital expenditures are concentrated.