Good morning and welcome to Dover's Third 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 of Investor Relations. After the speakers' remarks, there will be a question-and-answer period. As a reminder, 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, Gretchen. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through November 10, and a replay link of the webcast will be archived for three months. Dover provides non-GAAP information, and reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on our website. Our comments today will include forward-looking statements 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.

All right. Thanks, Jack. Good morning, everyone. Let's start with the performance highlights on slide three. Dover delivered revenue growth and margin improvement in the third quarter, driven by rigorous execution and improving price/cost dynamics that more than offset the impact of supply chain challenges, inflationary cost pressures, and foreign currency translation. Demand remains constructive across most of the portfolio with four out of five segments posting organic growth in the quarter. Backlog at $3.2 billion was up 12% year-over-year and remains approximately double the historical levels relative to revenue, driven by continued strong demand across many end markets. The supply chain challenges that we've endured over the past 18 months continued to improve, which has allowed us to reduce our backlog this quarter through increased production performance. It is our expectation that this trend will continue for the balance of the year as supply chains and lead times normalize. Despite the building macroeconomic uncertainty, we are deploying capital to drive productivity and expand capacity in several businesses that are expected to deliver robust growth on secular tailwinds. We closed on the Malema Engineering acquisition in July, which adds great technology to our biopharma portfolio, and we are continuing to pursue attractive bolt-on acquisitions. During the quarter, we also announced an accelerated share repurchase program to return $500 million of excess capital to shareholders while preserving sufficient liquidity for value-creating investments. While current demand conditions are solid, our management posture reflects growing caution with the macroeconomic outlook. As such, for the balance of the year, we'll be proactively reducing output in several businesses to draw down inventory balances and initiating cost-containment measures where appropriate. Our business model is flexible, as our 2020 performance has proven. We firmly believe that ongoing improvements in the supply chain and available production capacity will allow us to match production to meet demand within prevailing lead times in Q1 of 2023. We are adjusting our full-year guidance to reflect the negative translation impact of foreign exchange on our revenue and earnings. The estimated full year impact of foreign exchange to EPS is approximately $0.37 per share with notable acceleration during the third quarter as the dollar rallied against most of our trading currencies. Let's skip slide 4 and move on to slide 5. All-in-all, the quarter developed as we expected. The capital goods portions of the portfolio delivered strong top line and margin expansion on the back of strong order books, lower input costs cycling through inventory, as well as pricing actions taking hold. Engineered Products revenue was up 18% organically in the quarter on broad-based strength across the portfolio in major geographies as well as pricing actions. Margins were up 250 basis points year-over-year as our capital investments and productivity begin to show results and our investments in e-commerce platforms drive aftermarket volume. We expect margins to continue their upward trajectory through the balance of the year on solid volumes and improving price/cost dynamics. Clean Energy & Fueling was roughly flat on an organic basis. Revenue performance was up in clean energy components, vehicle wash, fuel transport, and below-ground retail fueling, but was offset by lower shipments and order trends in above ground retail fueling, driven by customer construction delays in North America, as well as overall caution among operators in Europe and Asia as a result of the weakening macro environment. Margins in the quarter were flat year-over-year as our clean energy margin mix and decisive cost actions were able to offset the reduced volumes and fixed cost absorption in the above ground dispenser business. During this quarter, we began to take fixed cost reduction actions in our dispenser business that were in part enabled by the global product platform harmonization and complexity reduction work that we've completed in the past 12 months, which enabled us to reduce our European dispenser SKUs offering by over 50%. These actions will continue through the first half of 2023 and will result in meaningfully improved operating margins going forward. In Imaging & Identification, volumes for our marking and coding printers and spare parts recovered well on improving electronics input availability as well as the roll-off of COVID lockdowns in China from the prior quarter. Pricing actions and consumables and service demand were positive contributors in the quarter. FX is a negative headwind to absolute revenue and profits in this segment given its large base of non-US dollar revenue. Q3 margins in Imaging & ID were very strong, improving 230 basis points, driven by pricing actions, product mix richness, and improved operational efficiency. Pumps & Process Solutions posted 2% organic growth. We saw solid performance in industrial pumps, medical and thermal connectors, polymer processing and recycling, and precision components. As expected, the biopharma components business, which delivered peak revenue in Q3 last year on COVID vaccine demand, declined year-over-year in the quarter as the biopharma industry continues to pivot from COVID vaccines to a growing suite of biologic therapies. Our non-biomedical and thermal connector business has grown 30% year-to-date, driven largely by demand in data center and electrical vehicle charger cooling applications. On the back of this demand and forecasted demand, we are finalizing the commissioning of a new assembly plant in the Minneapolis area in Q4. Operating margin in the quarter remained robust at approximately 30% despite a larger proportion of revenues from industrial products and from improved volumes, pricing, and efficiency programs across the segment. Top line in Climate & Sustainable Technologies continued to be strong, posting 19% organic growth on solid volume and pricing actions across all businesses and geographies. All three businesses have significant backlogs into 2023. Our capacity expansion programs and CO2 systems and heat exchangers remain on schedule as we continue to invest behind areas of secular growth beyond 2022. Margins were up 500 basis points in the quarter on price and strong volumes, materially improved productivity in food retail as a result of capital deployment projects and product complexity reduction and improved portfolio mix in can-making equipment and spares and heat exchangers. I'll pass it to Brad here.

Thanks, Rich. Good morning, everyone. Let's go to Slide 6. The top bridge shows our organic revenue growth of 9%, driven by increases in four of our five segments. FX was substantial at 5% or a $97 million headwind to our revenue growth as well as our profitability, resulting in a $0.11 negative EPS impact in the quarter. Changes in foreign currency translation from our last guide in July until today are estimated to have an incremental impact of approximately $0.10 on our full year EPS. M&A contributed $55 million to the top line in the quarter, a product of $89 million from acquisitions, partially offset by $34 million from a divestiture late last year. We saw solid organic growth across our major geographies. The US, our largest market, was up 11% organically in the quarter. Europe was up 9%, and all of Asia was up 13%. China, which represents approximately half of our business in Asia, posted 8% organic growth this quarter, up from a 4% decline last quarter as our businesses recovered from COVID-driven lockdowns that impacted our ability to produce and sell in the country. On the bottom of the chart, bookings were down year-over-year due to foreign currency translation and improved lead times across several businesses. Our cash flow statement is on Slide 7. Free cash flow through the first three quarters of the year sits at approximately $300 million, down year-over-year on capital expenditures investment, timing of tax payments and performance payments, but mostly on planned investments in working capital. We have been carrying elevated raw materials and components inventory levels throughout the year, reflective of our high backlog levels and input shortages as well as higher receivable balances on growing sales. We are actively working to bring down our inventory through the balance of the year and expect to further liquidate our working capital position with the degree of cash generation also dependent on the timing of collection of receivables. We expect free cash flow generation to significantly improve in the fourth quarter, which is historically our highest cash flow quarter of the year. However, the exact timing of working capital liquidation may take into early 2023. With that, I'm going to turn it back to Rich.

Thanks, Brad. Let's move to Slide 8 and discuss the key items for the rest of 2022, focusing on demand trends and backlog. Over a year ago, we indicated that we anticipated a moderation in comparable booking metrics as supply chains began to normalize, which is the case this quarter. Bookings have declined year-over-year compared to a very strong quarter last year, and backlog has also decreased this quarter due to improved production performance, contributing positively to our revenue. Our backlog is still at historically high levels, roughly double what it was relative to sales before the pandemic. This is less influenced now by extended lead times and customers placing orders well in advance due to supply chain and capacity constraints, but more by the strong fundamental demand for our products and solutions across various markets. We've previously discussed long-term growth drivers in some of these markets, and we are seeing significant near-term trends that are promoting investment in these sectors. Despite the strong demand, shipments were impacted in the quarter in several areas, especially in Engineered Products due to shortages of hydraulic components and chassis, as well as in Climate & Sustainability due to constraints in subcomponents and capacity. We are currently boosting capacity for CO2 systems in the United States and heat exchangers in four locations to meet the expected demand. The areas highlighted in orange were somewhat anticipated, but above-ground fueling slowed in the third quarter as customers faced short-term construction delays, pushing new projects into 2023. Additionally, the transition in biopharma from COVID vaccine production has taken longer than we anticipated. We expect both situations to normalize as we move into 2023, aided by inventory drawdowns and confirmed capital expenditure plans. Overall, our backlog remains high, which will support our revenue. Furthermore, our backlogs provide us with confidence and visibility to plan our production effectively, allowing us to manage our working capital by adapting production based on quarterly demand. Currently, about 70% of our Q4 revenue is already secured, and we have a robust foundation of booked business that extends into 2023, demonstrating a healthy balance between short and long-cycle aspects of our portfolio. Moving to Slide 9, we can examine the sources of value creation that contribute to our projected double-digit EPS growth this year. We anticipate significantly offsetting much of the $0.37 in foreign exchange challenges this year through strong execution and cost management. We are implementing short-term cost containment measures as needed and, more critically, initiating fundamental cost actions within our Clean Energy & Fueling segment. These measures are expected to yield approximately $0.23 per share in EPS improvement for the full year 2023. Additional cost actions are in progress, which we will detail in our Q4 call. Considering our ongoing restructuring efforts and this year’s share repurchases, we expect a solid base for EPS growth into 2023. As we get ready for various economic scenarios next year, we are confident in our portfolio’s ability to outperform and excel in our markets. The niche markets we serve remain attractive and structurally stable from a competitive standpoint. Our investments in back-office consolidation, e-commerce platforms, and reducing product line complexity are creating a multi-year opportunity to lower our fixed and variable costs while enhancing customer satisfaction. Through both organic and inorganic growth, we have effectively reshaped Dover since the spin-off in 2018, providing us with greater flexibility in portfolio decisions as we pursue our value creation strategy. In closing, I want to acknowledge the hard work our team has put in this year and express my gratitude to my colleagues worldwide for their commitment and impressive performance in a challenging operating environment. Now, Jack, let's open the floor for Q&A.

We'll take our first question from Steve Tusa at JPMorgan.

Hey, good morning, guys.

Good morning.

Hi, Steve.

So you took down the total revenue by 1%. I don't know, that's like maybe $0.10 or something like that of headwind, depending on how you convert it. You have some buyback benefit here that's pretty close to that. So what's the other part of the reduction in earnings? Is there anything else that's moving around, or maybe I'm underestimating the impact of revenue. Maybe, you're going to the low end of the range?

I believe we are making an estimate regarding foreign exchange for the remainder of the year, and we have not been accurate in our predictions throughout the year. Therefore, we are exercising some caution. Ultimately, we will focus on fulfilling our backlog. We are somewhat adjusting our production performance. Our working capital indicates that we have maintained excess inventory all year as we aimed to meet demand trends. We have observed significant improvements in our supply chain across most of our portfolio, with few exceptions this quarter. This enables us to ease up on production performance for the fourth quarter and reduce our working capital, with confidence that we can resume production in the first quarter and enhance performance next year. This strategy will allow us to benefit from reduced working capital this year and improved production next year. I believe this is a wise approach. I will refrain from commenting on our expectations for 2023 demand for now and will wait until next quarter. However, we are clearly being cautious about future market developments. I fundamentally disagree with the Fed's current actions. They claim to be data-driven, yet our results show that logistics and raw material costs have declined. The inflation we experienced over the past 18 months is easing. If they continue this approach with their data-driven claims, I don’t think we've yet seen the full impact of their policies. We are observing some effects in the housing market due to rising rates. If their goal is to reduce demand, we have no choice but to adjust our inventory levels and shift production to next year. It’s a mixed situation: we can benefit from improved working capital and cash flow this year, which, based on our current trajectory, would have pushed the working capital liquidation mostly into 2023. Instead, we can bring some of that into 2022.

Right. So basically, it's kind of like a bit of an under-absorption in the fourth quarter as you kind of turn that production down?

That's correct.

Said differently? Okay. And then one last one...

Say any way you want, but that's right.

What will the price and cost be for this year? And if you look ahead, what does next year look like so far? I'm sure there was some positive pricing this quarter, and perhaps some of that price will carry over into next year as well.

Yes. Looking at price and cost, we've been indicating all year that in the capital goods sector of our portfolio, due to inventory balances and our raw material exposure, we anticipated the second half would show these trends. When examining the performance of both Engineered Products and the refrigeration unit, their results are largely driven by the factors we've previously discussed. Currently, there’s no resistance regarding pricing, which we believe reflects ongoing demand. Importantly, we did not see this pricing in the first half of the year. If the current situation remains stable, we can expect a strong comparison going into the first half of 2023.

Okay. And that's positive price/cost next year you would expect?

I expect to have positive price/cost in the first half of next year, assuming that demand is reasonable.

Yes, okay. Great, thanks a lot, guys. Appreciate it.

Thanks.

Our next question comes from Andy Kaplowitz from Citigroup.

Good morning, guys.

Hi, Andy.

Rich, could you talk about the cadence of orders you've been seeing? I know you recently talked about some expected weakness in above-ground fueling. You've talked today about biopharma continuing to be a little difficult. But did you see any more signs of slowing in orders toward the end of the quarter here in October? And what are your customers telling you about how they might spend on CapEx going into 2023?

No, the only areas we've observed are those specifically mentioned in the slide. Besides that, we are not experiencing the strong numbers we saw at this time last year. However, quarter-to-quarter, our performance across the portfolio is still close to one, sitting at 0.96, so we haven't seen a drastic slowdown. Feedback from our customers indicates that those utilizing our products for capital expenditures have encountered delays and increased costs due to labor availability and inflation. As a result, there's a cautious approach to demand in 2023, with many customers opting to push some of that demand to next year while completing current projects. This is especially true in the above-ground fueling sector. On the biopharma front, our clients are experiencing challenges, and we started reducing our product supply to the channel earlier than others. As a provider of consumable products, it's important to note that systems manufacturers might not accurately reflect demand for our products. We believe we are slightly ahead in anticipating this demand, and as long as operations continue, our products will eventually be consumed, leading to margin benefits in 2023. Ultimately, I don't agree with the Federal Reserve's current approach. There's enough stimulus in the system that they might achieve their goals, but if they overcorrect, it could lead to decreased demand. Our customers are understandably anxious about this situation, so we can only prepare for various outcomes. With our flexible operating model, we are focused on performing well in the fourth quarter, and if we need to catch up in the first quarter, we are ready to adapt.

Rich, that's helpful. Focusing on DCST for a moment, you mentioned good visibility across all three of your businesses. There have been some concerns regarding Belvac, so could you provide some insights on that? Additionally, what trends are you observing in core retail refrigeration? You've also noted the expansion in heat exchangers, which is contributing to improved margins. How do you view margins going forward in that business?

I believe we have finally reached our goal. It may have taken five years, but I think we can take pride in that achievement.

Better late than never.

I believe we would have succeeded if it weren't for the COVID disaster. However, when you examine the backlog chart, a significant portion of it is Belvac, which has performed well throughout 2023. At some point, that business will need to shift focus towards more replacement parts, but we see that the installed base has grown significantly. Additionally, the margin profile for spare parts versus built units is actually beneficial to our margins. The goal for refrigeration remains strong. We anticipate a slight slowdown in deliveries in Q4 due to the Christmas season when construction projects typically halt. Nevertheless, our backlog in that area remains strong. For CO2, we believe there is consistent demand driving us to expand capacity. Regarding heat exchangers, we are increasing capacity in all geographic regions. We have experienced a considerable rise in volume for a product used in heat pumps. Major manufacturers are announcing global capacity expansions due to the shift in technology, which gives us confidence in our outlook.

Appreciate it, Rich.

Thanks.

Our next question comes from Jeff Sprague from Vertical Research.

Hi, thanks. Good morning. Hey, Rich, first, just this comment about portfolio optionality that you closed with, obviously, somewhat of a provocative statement. I know you said it at least one time earlier at a conference. I don't suppose you're going to name names on businesses or anything, but you did throw that out there. So maybe just elaborate on what you want us to think as you lay that on the table and where things might be headed?

Yeah. It's been a couple of years since we got the portfolio questions. I was missing them, Jeff. So I decided to put a recommendation to restart it. Look, I mean, I think that when we used to get questions about the portfolio, part of the answer that we gave was that you can't descale to the amount that we did back in 2018 and then begin talking about the portfolio because you run into a scale problem after a while. So if you remember, we spun off Apergy and we had to take some significant cost restructuring to accommodate the fact firm-wide that absorption was going to be an issue. And when we got asked questions again about bigger portfolio moves, part of the answer was, hey, look, there's a lot of value that we can create out of the existing portfolio, which we have, but also to the extent that we can rescale the portfolio, then that opens up an avenue where we don't have to worry so much about that. So that's where we are. If you take a look at where we were in terms of total revenue, pre-Apergy spin and where we're going to close now, where we've rebuilt that scale and that makes a variety of scenarios more possible on top of the fact that the portfolio in totality is worth a lot more than it was back in 2018.

All right. Interesting. So maybe just thinking about preparing for something tougher, as you mentioned, perhaps the Fed will have a significant impact. The cost actions we are currently focusing on are in Clean Energy & Fueling. Could you provide some insight on how you would further prepare if you anticipate challenges, including other areas for potential restructuring and what options you could consider?

The Clean Energy & Fueling segment is somewhat distinct. We were surprised in Q3 when demand decreased, as all the indications from our customers suggested there were numerous projects lined up for the rest of the year. This situation compelled us to execute actions we had initially planned for January and implement them in Q3 instead. We've been preparing for changes in the retail fueling business to adjust to conditions following EMV for quite some time. We have invested significantly in refreshing our portfolio and also dedicated substantial management resources to streamline our product offerings, which will enable us to make broader decisions about our business footprint and other factors in the future. While part of our response was indeed in reaction to the current demand environment, these adjustments were already on our agenda. We simply expedited them by about three to four months. Regarding the rest of the portfolio, I can only reference March 2020 and do not foresee a similar situation now. However, we have shown that if there is a significant drop in demand, we have several strategies we can implement, although I would prefer not to resort to them. Looking back at our performance in 2020 in terms of preserving margins, I believe we managed quite well.

Great. Maybe just one quick one. The 70% of Q4 in backlog, how does that stack up relative to normal?

Our backlog is significantly higher than historical levels, approximately 50% more. However, it varies depending on whether the cycle is short or long. For example, in the printing and ID segment, the backlog is higher but low in relation to revenue since that's a consumable business and we don't typically carry much backlog there. This creates a division between capital goods, which have longer lead times and larger build schedules, and shorter lead times. Overall, while everything is up, there are different dynamics at play among the various segments.

Right. Thanks for the time. Appreciate it.

Yes.

Our next question comes from Andrew Obin from Bank of America.

Hi guys, good morning.

Hi, Andrew.

Hey, just a question on backlog. We've been going to a bunch of industry shows, and it seems that some industry participants are adjusting just how they think about backlog structurally. There's a view that going forward, we will probably live with just permanently bigger backlogs, just because there's less visibility, longer lead times. At the same time, it seems that the industry also realized that maybe we've heard from some industry participants sort of protecting themselves in terms of pricing, right? So maybe there are now cancellation penalties. Can you just talk as much as you can about, A, how do you think about just this order and backlog process evolving into 2023? And given the fact that you do now have to probably live with longer backlog, even if you are reducing it, if you've sort of changed the structure of the backlog terms, conditions, pricing, anything like that, big picture? Thanks.

Well, that's quite an impressive situation. Having a backlog isn't a problem; I’d choose to have one rather than not. The complexities arise in managing the pricing of that backlog. Earlier this year, we faced challenges due to a substantial backlog from 2021 combined with cost inflation, which led to discussions about adjusting the pricing of our backlog in a competitive landscape. Everyone approached this issue differently. The current supply chain risks and the shortening of the supply chain have worked in our favor, and this will influence our backlog. However, it's hard to make direct comparisons between companies unless they are similar because different businesses can have consistent elevated backlogs. For instance, Belvac and Maag in our portfolio have long build times of 90 to 120 days, meaning we need to secure orders before acquiring subcomponents and raw materials. In contrast, with Maags, backlog isn't as concerning since it relates more to consumer volume and ensuring we price it correctly and deliver on time. There's a lot to consider here. Given our diverse portfolio, we encounter various scenarios. Currently, we are cautiously assessing backlog trends and we shouldn’t project trends into 2023 blindly. We're indicating that the supply chain has stabilized, and we expect to meet our deliveries in Q1 rather than delaying to Q4. That encapsulates our current strategy.

Thanks. I have a question about M&A. With interest rates where they are and high-yield markets in flux, how have you adjusted your approach to M&A regarding the cost of capital? What insights do you have about private equity players? Are they facing restrictions? Is anyone willing to make moves in this market? I’d appreciate a high-level overview of the M&A market. Thank you.

Yes, as you are likely aware, it's challenging to determine pricing at this moment. The revenue and demand expected in 2023 are uncertain. Additionally, there’s the matter of how much more value could have been obtained if sales had been made 18 months ago compared to now. Looking at the major banks, it appears that not much is happening in the market. Our fundamental outlook remains the same. We will adjust our WACC rates and discount rates to account for current interest rates, but we are not relying on debt for acquisitions. There are still some opportunities in the pipeline that we hope to finalize in the medium term. We are maintaining a proactive stance, although determining prices is proving challenging.

Thanks so much.

Thanks.

Next question comes from Joe Ritchie from Goldman Sachs.

Hi, thanks. Good morning, guys.

Joe.

Hey. Rich, maybe just a higher-level question to start. You guys talked about the capacity expansion. Obviously, the backlog is in good levels today. I'm just curious how you're thinking about that in the context of a potential slowdown in 2023, and ultimately, how you potentially manage to maybe having excess capacity if the demand environment does slow?

We are expanding capacity in areas where we believe there is consistent demand. For example, the growth rate we’ve seen in Minneapolis and with the heat exchangers gives me confidence in our capacity expansion efforts. Additionally, after pausing due to COVID and the significant demand surge over the past 18 months, we are now able to begin adjusting our footprint again. While I can't provide specifics on square footage, I believe that in 2023, we are likely removing as much fixed cost footprint as we are adding.

Got it. Okay. That's very helpful. My follow-up question is about the pumps and process business. You've been mentioning the transition in biopharma pumps for the last few quarters and the fact that you are now comparing against your toughest competitor from a year ago. I'm curious if you think we've reached a low point in margins in that business. Could you elaborate on how much longer you expect to see this transition within that segment of your portfolio?

Yes. We experienced some growth challenges on margins, achieving 29.7% instead of the expected 30%. However, we believe that this segment can reach a 30% margin for the full year, although there may be some quarter-to-quarter fluctuations. In the past, we noted during Q2 and Q3 of last year that while we posted margins of 35% to 36%, we maintained that a 30% margin should be considered the new normal for this segment. I am actually quite satisfied with the margin performance in Q3, especially when considering the significant decline in biopharma, which is undergoing a major inventory liquidation. Conversely, we've managed to improve the margins of the industrial businesses, which were previously under 20%. If this scenario had occurred three years ago, we would have faced severe margin compression. Fortunately, the operators in the industrial sector have significantly enhanced their margin profiles, enabling us to stay on track for a 30% margin this year. Overall, even if we encounter another challenging quarter in biopharma, I view that as an opportunity for margin improvement in 2023 rather than a setback.

Got it. That’s helpful. Thanks Rich.

Thanks.

Our next question comes from Scott Davis from Melius Research.

Hey, good morning guys.

Hi Scott.

Most of my questions have been answered. But regarding foreign exchange, Rich, is it primarily a translation issue? Or have we reached a point where there's actually some global trade being adjusted?

Look, the vast majority is translation. I'll let Brad step in because if you can imagine with having 18 operating companies, finding out transaction on FX, I don't believe it's meaningful. But he's done…

No. That's correct. It's mostly translation. And as you know, as we talked about in the script, we said the strength of the dollar was so fast in Q3 here that it really changed the dynamics of what we saw and the impacts on top line and on our EPS. And again, it's about $0.10 forecast to forecast, happens to be about $0.10 at the midpoint of our guide, too. So you could look at it that way. There's lots of ways to look at our guide change. But I would tell you, FX and where we're at now and the strength of the dollar, it's significant. And it's been significant all year, but even more so now. I don't think we're unique, though, Scott. I don't think we're unique in that regard.

Likely not. To clarify a bit, Rich, regarding M&A, I'm curious about how broad your perspective is on this. Are you considering the available assets? We're hearing that there aren't any counterbids from traditional players, as many are playing it safe. Is your perspective broad enough to consider pursuing opportunities outside your current portfolio?

No. I think the real question is how long is a piece of string? I will address your question in two ways. First, it needs to be a business that we believe we have the fundamental right to operate. We are ultimately a manufacturer. Therefore, if it's a manufacturing business with processes on the factory floor that are similar to ours, and if our management team is capable of extracting value, it doesn’t have to be in a market we currently participate in. However, we are not making sudden shifts into new areas in pursuit of trends. We are more focused on our core strengths. We understand what we excel at, and we have developed a back-office engine that allows us to realize significant synergy costs from businesses that align with ours over time. As for scalability, we are now equipped to take on projects much larger than what we would have considered back in 2018 or 2019.

That’s helpful. Thank you. Good luck guys. Appreciate it.

Thanks.

And our last question comes from Joe O'Dea from Wells Fargo.

Hi, good morning. I wanted to revisit base cost and then the cost side of things. And could you talk about the raws piece versus the components piece and timing of when we start to see some of that come in? I would assume that raws just kind of flows through, but I'm not sure what you're seeing from your suppliers and how much pressure you're putting on them to get cost down in a lower raws environment.

The raw materials are showing benefits now after experiencing inventory issues in Q2. In Q3, we are seeing a positive price versus cost situation for raw materials. However, the pricing for subcomponents remains inconsistent because demand still outstrips supply. If that changes, we will put more pressure on our component suppliers to adjust their pricing. Currently, there is a standoff where everyone acknowledges the need for the product and is willing to pay for it. We are benefiting from reduced raw material costs moving through our inventory, but we have not yet experienced similar trends with subcomponents. The situation will depend on volume as we move forward.

Got it. Regarding Clean Energy & Fueling and the cost reduction, I want to clarify the extent of the margin benefit to ensure we understand the timing and impact correctly. It seems we could see a margin increase of around 250 basis points as early as Q4. Could you discuss the timing and scale of that? Additionally, if you're able to share, how does the magnitude of the additional cost reduction compare to what you are currently reporting?

You won't notice it in Q4, except for how it's mitigating the negative fixed cost absorption by reducing production. In terms of segment margin, although it may not be apparent, what you would have seen in Q3 is that if we were to take some of that cost action, you would have experienced margin compression in the segment. We anticipate this will continue into Q4, depending on our production performance across the portfolio. Additionally, there is a rollover benefit to consider. We will address this further at our Investor Day since we have not established longer-term margin targets. Let's wait until we provide guidance for 2023 at that Investor Day, where we will clarify the potential upside, as this represents a fundamental shift in the business model rather than merely cost reduction.

Thank you.

Next question comes from Deane Dray from RBC Capital Markets.

Thank you. Good morning, everyone.

Good morning. Hi.

I have a few clarification questions. I want to revisit Andy's inquiries regarding the decline in bookings. It's modest, but Rich, is there any effect as you enhance lead times? We're hearing that customers no longer need to order as far in advance. Additionally, they're placing smaller orders. Are you noticing that shift?

Not the fewer units because the lot sizes on the components business are what they are, and then the buildup units, we get orders of one. But look, Deane, at the end of the day, it's natural. With the uncertainty that's out there, the hope that pricing is going to come down and everyone recognizing the supply chain is improving, no one's going to order transactional products six months in advance. We were warning everybody when our backlog was going up. Despite the fact that everyone wants to reduce book-to-bills by 0.5%, it's healthy in a way. What our customers are saying is that they're going to return to more traditional order patterns. We are having many discussions with our customers about capacity utilization, transitioning back to a model where if you don’t give me your orders, you won’t be getting the product. That was our reality for the last 18 months.

Got it. And then just on your European outlook, you're not seeing it in the numbers yet, but are there any contingencies you have in place and maybe even for fuel availability? Just how have you thought that through for the next couple of quarters?

We are a small manufacturer in Europe, so we do feel the impact of fuel as an input cost, but our operations are quite different from those of a chemical manufacturer. We remain cautious about demand in Europe and have maintained that caution throughout the quarter. This concern is part of our broader discussion on reducing production performance and managing working capital, which is largely driven by trends in Europe.

That's helpful. And just last one. Could you just clarify on the pump side and biopharma? How is your mix related to non-COVID? You've had a COVID boost. But if there's less COVID production, vaccine production, et cetera, how is your non-COVID exposure?

Yes. I'm not going to provide that information right now. You can follow up with the team for clarification. I don’t have the details readily available, so let the team assist you with that.

Sure. Thank you.

Our next question comes from Nigel Coe from Wolfe Research.

Thanks. Good morning, everyone.

Hi.

Hello. Thank you for the information, as always. Rich, you mentioned cost reductions in some areas, particularly regarding fuel and the Fed. We've adjusted our perspective on demand disruption. Are there any other strategies in place, such as slowing down hiring? It seems like you're selectively investing in capital expenditures. Are there plans to decrease CapEx in 2023? Are there any additional actions to prepare for an uncertain economic environment?

I believe capital expenditures will decrease in 2023, regardless of demand conditions. Although we haven't finalized next year's budget, I expect that it will be lower. The focus will mainly be on maintenance and projects we've already announced. I'm not aware of any additional significant initiatives at this time. Regarding hiring, we are being selective by region and business, and we have been gradually implementing this over the quarter.

Okay. Regarding the inventory, there was a slight increase quarter-over-quarter. I'm unsure if that was primarily due to inflation. How much inventory do you anticipate will be reduced by year-end? I know you mentioned the first quarter of 2023; how much do you believe can be cleared by year-end? Also, Brad, could you comment on the production talent you expect for the fourth quarter?

I understand. As Brad pointed out in the script, we don't have a significant amount of finished goods inventory. What we currently have includes work-in-progress and raw materials, which we expect will decrease. The challenge will be how the revenue timing affects receivables. We've reduced production performance to focus on inventory management for the reasons I previously mentioned. I'm not sure if Brad plans to provide details on potential monetization, but I don't anticipate it being substantial. It's important to be cautious when considering the scale of the inventory reduction in relation to its impact on working capital due to receivables.

Yes, I believe that the timing is crucial. It has taken quite a while to build up the inventory, and it will also take time to reduce it, but we are actively addressing this. I expect the fourth quarter to perform similarly to our historical trends, as it is typically our strongest quarter. Over the past seven years, we've achieved high teens or even over 20% free cash flow to revenue in the fourth quarter. Our aim is to reduce inventory and liquidate some receivables to align with that performance. We'll see how effectively we can manage this. As mentioned earlier, it may extend into early 2023.

Okay. That’s helpful. Thanks guys.

And our last question comes from Julian Mitchell from Barclays.

Hi, good morning. Thanks for fitting me in. I wanted to revisit the dynamics of inventory and cash flow. When you examine your customers' inventory levels and any excess, do they align with where you believe your excess inventories are? Could you also identify some areas within your customers or distributors where you see significant excess inventory? Additionally, when considering the balance of underproduction and its effect on your free cash flow, should we anticipate that next year may see lower cash flow conversion as you focus on protecting earnings while reducing inventory and receivables?

Where should I begin? If we reduce production, it's to clear out inventory. Going into next year, we hope to see inventory levels recover, which would indicate strong demand. However, we won't discuss demand for 2023 because it remains uncertain. The inventory we can observe is in distribution, and we are not aware of any excess in the supply chain. What we can see is the inventory held by OEMs, and it seems there has been significant excess there. However, we don't manufacture finished goods for stockpiling. The finished goods inventory we have is tied to specific orders. The only area of concern could be raw materials, but I'm not overly worried about having excess raw materials that won't be used over time, as they will be utilized based on the pace of demand.

Understood. Thanks. And my follow-up just around the restructuring and the cost-out. So I think your restructuring expense guide for the year is unchanged at $0.17 now. I think it was $0.16 before, and that's probably just the share count guide coming down. But it seems like you're talking up the cost savings from restructuring next year. So I'm just wondering how you're generating those savings if you're not booking the P&L restructuring or not stepping up the booked P&L restructuring expenses.

No, Julian, I'm not referring to the restructuring expenses. What I'm indicating is that the chart shows benefits. We've provided the EPS benefit from the restructuring for 2022 and the full year benefit of those announced restructurings for 2023. We have additional restructuring projects in progress that we will disclose at the appropriate time. The important point is that when we take a restructuring charge, we feel it is our responsibility to communicate the anticipated benefit, which is based on a 12-month outlook for next year. This does not account for any unannounced restructuring.

I understand. So the savings next year might be reflected in the restructuring expenses for 2023 itself?

Yes, sure.

Full year benefit of it, for sure.

But some of that is also in 2022, as Richard said. So it straddles both.

That’s clear. Thank you.

Welcome.

Thank you. That does conclude our question-and-answer period and Dover's third quarter 2022 earnings conference call. You may now disconnect your line at this time, and have a wonderful day.