Good morning and welcome to Dover's Fourth Quarter and Full Year 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, ladies and gentlemen, this conference call is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Jack Dickens. Please go ahead, sir.

Thank you, everyone, and thank you for joining our call. An audio version of this call will be available on our website through February 21, and a replay link of the webcast will be archived for 90 days. 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.

Thanks, Jack. Let’s get started with the performance highlights on Slide 3. Dover delivered strong organic revenue growth of 9% and margin improvement of 150 basis points in the fourth quarter. Volume mix, price cost, and prior period cost reduction actions all contributed to the positive performance. As we've been forecasting throughout 2021, the relationship between supply chain constraints and bookings has continued to play out into Q4. The majority of the labor and component availability and logistics constraints have dissipated, resulting in production lead times returning to pre-pandemic levels. Importantly, our 4% annualized through-cycle organic bookings growth rate reflects the continued secular demand strength across our businesses. Our order backlog remains elevated compared to normal levels and provides us with good topline visibility going into 2023. Our continuous efforts to improve productivity and efficiency, principally enabled by advances we achieved in e-commerce adoption, back office consolidation, and SKU complexity reduction resulted in robust margin accretion in the quarter. We expect benefits from our research efforts to further accrue in 2023. We continue to deploy capital toward portfolio improvement, organic growth, and production efficiency in 2022. Our capital expenditures in 2022 were the highest in recent Dover history, and we continue to invest in manufacturing productivity projects and proactive capacity expansions to fuel our top line growth and margin improvement capabilities. We also completed five attractive bolt-on acquisitions in 2022 that provide exposure to high growth technologies and end markets. Finally, we took the opportunity to return capital to our shareholders, including the completion of our $500 million accelerated share repurchase, which was completed in quarter four. We entered 2023 with a constructive stance. Demand trends remain healthy across our portfolio, and we have a significant volume of business in backlog entering into the New Year. Expected revenue growth, price actions, and productivity measures from 2022 lay the foundation for margin accretion in 2023. I have high confidence in Dover's end markets, flexible business model, and proven execution playbook continuing to deliver earnings growth. Our strategy for robust through-cycle shareholder value creation remains unchanged: to combine solid and consistent growth above GDP, strong operational execution generating meaningful margin accretion over time, and value-added discipline capital deployment. As a result of this, we are forecasting guided revenue guidance of 3% to 5% organic revenue growth and adjusted EPS of $8.85 to $9.05. I'll skip slide 4, and let's move on to Slide 5. Engineered Products revenue was up 16% in the quarter continuing the trend of double-digit top-line growth through the year. Revenue growth was broad-based across the portfolio, with particular strength in North America. Margins continued the sequential build throughout the year finishing at 20%, a 620 basis points year-over-year improvement primarily driven by improving supply chains and price cost dynamics, product mix, as well as investments in productivity initiatives. Clean Energy & Fueling finished the quarter and the year roughly flat on an organic basis. Revenue performance for the quarter was up in clean energy components, vehicle wash, fuel transport, and below-ground retail fuel, offsetting the comparable decline in dispensers and EMV card readers in the period. Margins in the quarter were up 170 basis points on positive price cost and the mix impact from both organic and inorganic investments that we made in clean energy components and vehicle wash. This was augmented by further cost reduction actions initiated in the third quarter, and the full-year carryover from these actions will continue to accrue in 2023. In Imaging & Identification, volumes for our marking and coding printers, spare parts, and consumables were strong in all geographies, with the exception of near-term softness in China due to the COVID impact. Our software businesses continue to perform well with strong growth in the SaaS portion of our serialization software. FX remained a negative headwind to absolute revenue and profits in the segment given its large base of non-US dollar revenue. Q4 margins in Imaging & ID were very strong at 25%, improving 250 basis points on stronger volumes, pricing actions, and product mix richness. This business has delivered exemplary margin improvement in the last few years as it utilizes our productivity tools for e-commerce, back office consolidation, and offshore engineering. Pumps & Process Solutions was up 4% organically for the year but posted a 4% decline in the fourth quarter driven principally by post-COVID transition in the biopharma space. The non-COVID biopharma business has continued to grow and our overall biopharma business remains above its pre-pandemic level. New orders for biopharma connectors reflected positively in the fourth quarter after several quarters of sequential declines. All other businesses in this segment posted solid organic growth in the fourth quarter with particular strength in polymer processing equipment and precision components in the backdrop of improved conditions in energy markets. Operating margin for the quarter was 29% with a comparable revenue mix of products delivered. Topline in Climate & Sustainability Technologies continued its double-digit growth in the fourth quarter, posting 27% organic growth across all business geographies. Demand trends remain particularly robust in heat exchangers and CO2 refrigeration systems driven by the global investments in sustainability. Our capacity expansion programs in both these businesses remain on schedule and will continue to allow us to meet growing customer demand. Margins are up 450 basis points in the quarter and over 300 basis points for the full year on improved productivity in food, retail, and strong volume growth with a good mix of products delivered. I’ll pass it on to Brad here.

Thanks, Rich. Good morning, everyone. I'm on Slide 6. The top bridge shows our quarterly organic revenue growth of 9% driven by increases in four of our five segments. As expected, FX was a substantial headwind at 5% or $94 million and impacted both revenue growth and profitability. FX headwinds resulted in Q4 and full year 2022 negative EPS impacts of $0.10 and $0.35 respectively. Recent euro gains against the dollar have reduced our forecasted FX headwinds in 2023, which we currently estimate at $0.05 to $0.10 for the full year EPS. M&A contributed $58 million to the top line in the quarter, a product of $80 million from acquisitions partially offset by $22 million from divestitures late in 2021. We saw strong organic growth across most of our geographies in the quarter. The U.S., our largest market, was up 7% organically, Europe was up 19% organically driven by particular strength in polymer processing, beverage can making, natural refrigerant systems, and heat exchangers. All of Asia was down 1%. China, which represents approximately half of our business in Asia, declined by about 10% in Q4, driven by short-term impacts from the COVID resurgence. On the bottom chart, bookings were down year-over-year due to foreign exchange translation and normalizing lead times across several businesses. Now on our cash flow statement on page slide 7. Free cash flow for the year came in at $585 million, down year-over-year, due in part to increased capital expenditures, one-time tax payments, and investments in working capital supporting growth. At our current earnings margin, we would expect to generate free cash flow of approximately 13% of revenue in an average year. 2022 free cash flow lagged behind that level, due primarily to elevated working capital investment, driving two thirds of the gap. As previously discussed, we view incremental investment in inventory over the past two years as productive despite its carrying cost, enabling us to deliver 17% cumulative organic top line growth and over 30% growth in absolute EBITDA between 2019 and 2022. We are now focused on extracting back cash invested in inventory. As supply chains improved in the fourth quarter, we began reducing inventory, particularly finished goods. The majority of excess we carry into 2023 is in raw materials, and we expect to consume a significant portion of that excess in the first half of the year. In addition to inventory reductions, we expect to collect elevated receivables from the fourth quarter and normalize our payable balances, driving significant improvement in working capital in 2023. We also forecast lower CapEx following a stepped-up CapEx in 2022. As a result, our forecast for 2023 free cash flow is between 15% and 17% of revenue. I'll turn it back to Rich.

Okay, I'm on slide 8. I'll be brief on this slide since we've been discussing the linkages between bookings, backlog, and revenue and the expected trajectory of these metrics for nearly two years. First to remind everyone that in 2021 bookings of $9.4 billion driven by the post-COVID demand surge, as well as constrained supply chains that required customers to draw orders in advance, were roughly 20% higher than our revenue that year, resulting in an unprecedented backlog that requires time to ship and unwind while bookings normalize. Importantly, concerns about double ordering and cancellations did not materialize. We have been depleting the backlog in an orderly manner as product lead times improved. If we smooth out the post-pandemic surge in bookings, our bookings CAGR has been 4% from 2019 to 2022. Let's go to Slide 9 here; we show the growth and margin outlook by segment for 2023 that underpin our guidance. We expect Engineered Products to remain solid. Pent-up demand and automation initiatives and waste hauling support our robust outlook. Despite high demand, our refuse collection vehicles shipments in 2022 still have not recovered to pre-pandemic levels due to chassis availability. After an excellent performance in the vehicle services group in Q4, we expect a slower start in 2023, and Engineered Products is forecast to improve margins in 2023 on solid volumes and benefits from our recent productivity and capital investments taking hold, along with positive price cost tailwinds. Clean Energy & Fueling is expected to grow mid-single digits organically, which we expect to be second half weighted due to demand for dispensers during the year. Dispenser bookings are beginning to normalize, and we expect Q1 to be the trough for the business with gradual recovery through the remainder of the year. All other businesses in the segment are positioned well for growth in 2023, with particular strength in our clean energy components. For the year, we expect margin improvements in Clean Energy & Fueling as well as volume recovery, improved mix, and recently enacted restructuring actions in above-ground fueling. Imaging & ID is expected to continue its trajectory of steady GDP growth and attractive margins. We see robust demand for new printers and components and consumables, and the outlook for the bulk serialization and brand protection software is also strong. Margin successes in this business are robust, and we expect them to remain as such into 2023. We project flat organic growth in pumps and process solutions. Our industrial pumps, plastics and polymers, precision components, and thermo connector businesses are all positioned for solid growth. The biopharma components business is expected to hit its bottom in volume and margin in the first quarter as customers work through and repurpose excess inventory. We are beginning to see encouraging signs and bookings for our biopharma connectors, and our full-year forecasts may prove to be conservative. The long-term tailwinds of single-use components for biological drug manufacture remain compelling, and importantly, our products are specified for regulated manufacturing of therapies with an attractive growth outlook. We continue to win new specifications and have an active pipeline of new biologic and cell and gene therapies. Margin performance is expected to be roughly flat for the year with a sequentially lower level in the first and second quarters on unfavorable product mix from slower biopharma and geographic mix from higher sales in China for plastics and polymers. The growth outlook for Climate and Sustainability Technologies remains solid as our businesses continue to ship against strong backlog levels. We are forecasting continued double-digit growth in both natural refrigerant systems and heat exchangers for heat pumps. Our beverage can-making businesses booked well into 2023 and expect continued margin improvement in 2023 on volume conversion, productivity gains, and mix. Move on to Slide 10. Here we show our recent performance against our capital allocation priorities, which are to reinvest in our business, representing the highest return on investment. 2022 marked a recent record for CapEx with numerous capacity expansions and productivity investments completed. We will continue our efforts to add attractive bolt-on acquisitions to improve our portfolio by entering new markets with secular growth. We invested $325 million into five highly attractive acquisitions in 2022. We're carrying significant firepower in a compelling M&A pipeline into 2023. Finally, as we did in 2022, we will return excess liquidity to our shareholders through increased dividends and opportunistic share repurchases. Let’s move onto Slide 11. To wrap up, before we get into our full-year guidance, I’ll make a few comments on our view of the macro environment and how we believe the year may develop. First and foremost, we hope that the Fed is cautious going forward. We support the efforts to tackle inflation, which has significantly impacted the economy; however, we believe that the Fed has gone far enough, and the lagged effect of further actions can be problematic to economic growth. Market participants are likely to be cautious with the timing of their demand-generating decisions as there is a recognition that manufacturing lead times and logistics constraints have been largely repaired. Thus, we expect first-quarter demand to reflect this cautious stance. We anticipate seasonality to the year to be weighted toward quarters two and three in terms of revenue and earnings, while the first half will be stronger for cash flow as our balance sheet reflects liquidation of inventory and receivables from 2022. Despite the uncertain macro environment, our goals remain ambitious; we will push hard to win our share of demand. We have done extensive work to improve the performance of our products, and we assert that we are well-positioned to win. We have proactively expanded capacity to meet projected demand in segments of the portfolio with significant secular growth opportunities. Now allow me to provide our guidance on EPS performance from a longer-term perspective. Our objective is to deliver double-digit through-cycle EPS growth for our investors through a balanced mix of healthy revenue growth, margin accretion, and value-creative capital deployment. We have been delivering on this commitment and will continue to drive forward on it. I want to thank our customers for trusting Dover businesses to deliver on their important needs, and I’m grateful to the Dover teams across the world for continuing to serve our customers and execute well despite various challenges. That completes our comments. So Jack, let's go to questions.

We'll take our first question from Andrew Obin from Bank of America.

Good morning, this is David Ridley-Lane on for Andrew. There are different reasons for each segment, but the guidance assumes better second half growth in three of the five segments. What's kind of the underlying demand assumption? Are you assuming things are fairly stable, or do you embed a kind of deterioration in underlying demand given you're seeing better second half growth in several segments?

I think that the feedback we're getting from our customers suggests they are starting off the year cautiously. In many portions of the marketplace, inventory needs to be depleted, and there is concern about the macro conditions. There’s also a view that inflation is coming down, and that being prudent about when to start projects is probably the right approach. Furthermore, I think they face a challenging comp in Q1, just due to FX alone. So I don't think there's anything other than, as we mentioned, biopharma meeting expectations and beginning to inflect positively from there. I think it’s just an overly cautious stance going into the New Year. Everybody knows that lead times have improved, so they don’t feel the need to place orders and take deliveries in Q1. This way, it will revert back to the historical seasonality of the Dover portfolio, with a slower start in the first quarter, and then higher performance in quarters two and three, followed by a strong finish in Q4.

Got it. A quick one on China, I heard you mentioned that you’d seen some demand disruptions due to the COVID resurgence. Any concern about labor-related disruptions in your operations? Are suppliers showing up later this year?

No. From a supply standpoint, we are not overly levered towards China, with the exception of electronic components, which don't comprise a disproportionately high amount of our purchases. So no, I don't see that as a concern. Our stance is that the situation in China is going to get better from here, not worse.

Thank you very much.

The next question comes from Jeff Sprague from Vertical Research.

Thank you. Good morning, everyone. Hey Rich, just on the order normalization agreement and talking about this for a long time, do you expect things to revert back to that kind of historical balance for your backlog, call it 20% or so forward sales by the end of the year? Or do you think this takes a bit longer to normalize?

A lot of that depends on the macro, Jeff, at the end of the day. But yes, I would expect to go back there. I would call your attention to the slide that we had at the end of Q3 that showed normal backlogs by segment. We would expect to go back there. If 2019 is normal, that comparison can be made. We would expect to return there.

And then, Rich, given…

But it may flex over time. And I’ll leave it at that. It will revert back to the levels you saw in that slide.

Okay, great. Thanks for that. The nature of my follow-up here is what is the price discussion like on orders now that, as you say, supply chains are normalizing, and there’s an expectation that inflation does begin to fade? Do you see downward pressure on price, and maybe put that in the context of what your own cost equation looks like in 2023?

Yes, we've been pretty disciplined in terms of not repricing our backlog, for sure. So I don't expect any issues that are unmanageable. What we can expect at the beginning of this year is that everyone has the view that inflation is coming down. This includes us when we deal with our own suppliers. If I spend some time in Q1 renegotiating, maybe I can force some improvements to a certain extent. So in our estimates, we don’t have any unannounced pricing that’s not baked into our numbers, and there is no additional price increase planned for the June time period. But it’s going to be interesting to see how it develops over time. I think the order rate may be delayed until we reach a position of back and forth involvement regarding delivery times and price negotiations.

And that algorithm leaves your price cost positive for the year as it stands?

Yes. Yes. Our estimates are that price cost will be positive for the year based on what you see rolling forward in Q4.

Right, thank you.

You’re welcome.

Our next question comes from Steve Tusa from JPMorgan.

Hey, guys, good morning.

Good morning.

If you have these backlogs, right, and expect to work them down over the course of the year, why wouldn't that mean that, assuming those lead times are somewhat extended, it would help normalize seasonality, given that you’re delivering against a backlog which should help sales in the near term? Why are customers not taking this stuff earlier?

Well, many of them are, based on their own CapEx plans. As we discussed at the end of Q4 about the decline in dispensers, it was interesting to observe because we were shipping heavily in below-ground and hardly shipping anything above ground. That was a reflection of the delay in getting these projects completed due to supply chain constraints and labor issues. I think we're going to see a little more of that in Q1., Despite having the backlog, customers are not saying, 'Deliver it on January 1, and I'll warehouse it until I need it.' They simply don’t see the need, which explains the current marketplace situation. Due to the orderly depletion over the balance of the year, they are relying on the timing of their projects, which means they may want delivery in March or April.

Got it. How much pricing are you assuming this year in the organic?

I don't think that we disclose that, but a good portion of our organic growth is price.

Okay, one last one for you, regarding orders. To get to that level of backlog at the end of the year, it looks like it's roughly a $2 billion backlog assuming a mid-single digit growth rate, which would imply roughly $6 billion of orders. Does that feel about right?

Let me do it in my head. Yes, that’s close. If that's the case, it will depend significantly on what happens in the long-cycle portion of the business. This includes our Maags, the Belvac businesses, and to a certain extent, SWEP, which is also becoming a long-cycle business as we're beginning to focus on selling capacity rather than just products. If those three businesses continue to perform well, then yes, that should be the case.

Yes, those would also be the toughest comps in the first half.

Correct.

Great. Thanks.

Thanks.

The next question comes from Joe Ritchie from Goldman Sachs.

Thanks. Good morning, guys.

Hey, Joe.

Rich, I just want to make sure I understand your seasonality comments as they relate to the first quarter. Because if I go back to prior seasonality, it has typically shown the first quarter as being high teens to mid-20s percentage of the full year. If I use the midpoint, it puts me around the $2 range for the first quarter. I just want to ensure that I'm level-setting correctly.

Joe, I don't have Excel open here in front of me. I’d just like to say this is a general statement based on feedback from the marketplace. There is concern about recession. There is a bias toward being cautious with inventory. So we just think that the takeoff of orders, as you noted, will start slowly until everything is in sync. Although I’m not predicting a collapse in Q1 at all. We just want to emphasize being careful in Q1. The full year remains the focus, which we are confident in, but we recognize that caution exists in the marketplace. Everyone is going to be careful about how much inventory they commit to until they can assess macro conditions.

Got it. That makes sense. A quick follow-up: last quarter, you had mentioned a roughly $0.23 benefit in DC from the cost actions. Are we still on track for that $0.23? And across the rest of the portfolio, where do you see opportunities for margin expansion in 2023?

I believe that all of the $0.23 was in clean energy; $0.19 of the $0.23, more or less, is there. Yes, all components are on track. The $0.23 was a difficult comp in that business since it was still delivering heavily in Q1, but we expect to be offset by clean energy components and below-ground car wash, which are margin accretive. Essentially, throughout the year, there will be a positive mix on the portfolio. However, we need to remain cautious in Q1 due to the poor comps.

Got it. Makes sense. Thanks, guys.

Thanks.

Our next question comes from Andrew Kaplowitz from Citigroup.

Rich, could you give us a little more color regarding your expectations for DPPS in 2023? What's your conviction level in terms of biopharma connectors destocking ending in Q1? I know you mentioned bookings have begun to inflect sequentially. Regarding margin, I know you're forecasting flattish for the year in this segment. Given where Q4 2022 left off, it's not that easy to get back to those levels. So maybe you could elaborate on your cost controls and productivity actions in that segment that will help you return to 2022 levels?

Yes, we took costs out as volumes declined in that sector for sure, and we tackled that progressively throughout the year. I think we took further action prominently in Q3 and Q4. Look, orders are beginning to inflect. We are paying meticulous attention to the commentary from our customers, who are indicating it’s an H1 event with expectations of clearing out all the inventory. I want to assure you that we have not been overly ambitious in our full-year estimates. I expect challenging H1, but given our approach, we are more likely to exceed our expectations in the second half. However, what we need to see is an uptick in order rates and our ability to expand capacity once we do observe growth, which I believe we can manage. Margin being flat year-over-year means we need to exercise care with our cost controls, but we also rely on polymers, plastics, and precision components to deliver the volume we currently expect from those businesses.

Great. Rich, I know you don't want to divulge too much information ahead of your Investor Day in March. However, in terms of portfolio management, you've mentioned that more frequently lately, so could you provide an update on that? Additionally, you discussed SKU management earlier. We know you have been intensely focused on costs. In terms of your longer-term margin targets, is there anything that you can share as a preview? I assume margins can rise significantly from where they ended in 2022?

Well, that’s going to form part of the broader discussion in March. My comment regarding business model evolution indicated that we have endured the EMV phase and are transitioning to the clean energy sector, particularly regarding hydrogen. We’ve been proactive through acquisitions, positioning ourselves for profit while the revenue curve rises. As far as long-term growth potential is concerned, we have substantial organic revenue potential that is likely underestimated. The product mix we have since 2020 has transformed significantly. I think we’ll grow faster than generally expected, primarily due to mix being critical here.

Do you expect to provide a specific target around organic growth? Or is it like GDP plus?

I couldn't say for certain yet.

Fair enough. Thanks, Rich.

Our next question comes from Scott Davis from Melius Research.

Hey, good morning, guys.

Good morning, Scott.

The M&A markets have come down to more realistic levels. Do you expect to be a bit more active in 2023?

Well, taking on any leverage for a deal has not been welcomed by anyone recently. So we must be careful with larger deals. The capital markets aren’t favorable to leverage due to uncertainties surrounding the macroeconomic outlook. However, we believe realistic multiples are now reflective of conditions in the capital markets. Most of our deals involve private companies, and there is often a lag between public capital markets and private valuations. This gap has narrowed with recent valuations.

Okay. I don’t want to dwell on minutiae but is there such a thing as a can-making cycle? It seems like we’ve had pretty high demand for several years in a row. Is there a significant investment cycle now, followed by air pockets? Is there a new dynamic within that sector?

Yes, I must be careful about making definitive statements on that. It is indeed a cyclical business with investment cycles. The challenge is avoiding overcapacity as the cycle experiences growth while ensuring we leverage spare parts sales, which tend to be margin-accretive when demand subsides. That said, it is intriguing to monitor the shift in PET usage in beverages. There’s a pushback on ESG lately; however, PET isn’t favored from an environmental standpoint. If we see an increase in affordability of aluminum due to ESG considerations, we can expect a significant portion of the market to react. So capturing just 15% of the PET market would drive an additional cycle. That’s our current perspective.

Alright. Good luck, guys, in 2023.

Thanks.

Our next question comes from Joshua Pokrzywinski from Morgan Stanley.

Hey, good morning, guys.

Good morning.

Rich, you have been monitoring what's happened with orders and backlog and observing Fed movements for some time now. Has your view of downturn management evolved considering the scarcity we've experienced in hiring and sourcing new suppliers? Does that create more of the same scarcity even after the recovery?

Yes, I don’t foresee returning to the logistics constraints we experienced. I view that as a one-time event with the macroeconomic collapse and restart, in addition to the turbulence in energy markets that elevated logistics costs. I don’t anticipate a repeat under reasonable macro scenarios from this point on. There’s considerable liquidity presently being withdrawn from the general market. I think lending is very tight, and it's tough to secure loans and liquidity for businesses currently, which I am not referencing specifically to Dover. If this persists, private companies may have to draw down inventory to low levels due to their liquidity situation which could negatively affect future orders and revenue.

Got it. That’s helpful. Regarding Q4 orders, do you believe that as lead times normalize, this quarter may reflect a scenario where customers might exercise caution and refrain from ordering, recognizing they don’t require things earlier than normal? Is there a potential low point for orders as lead times normalize, or is that a subtle effect?

No, that’s exactly our perspective. We anticipate the normalization to continue through Q1, followed by expectations for a positive inflection in demand thereafter. However, we expect another quarter of the kind of behavior you’ve described, where customers know they can secure product. As a result, they may take the chance to deplete inventory since they are aware they can receive deliveries in Q2. Thank you.

Our next question comes from Guy Hardwick from Credit Suisse.

Hi, good morning.

Hi, good morning.

Rich, I believe on the last call you indicated a fundamental change in the business model in DCF. Are you prepared to elaborate on that today?

I will reserve that for the Investor Day. My comment suggested that we have transitioned through the EMV phase and the overhyped EV sector towards positioning ourselves to capitalize on profits over the next two decades. Our Q3 moves are setting us up to be appropriately positioned. The timing needs to be right to raise revenue before moving further.

Could you clarify your backlog projections? Where do you see yourself at year's end?

Let’s take this off-line because everyone has a distinct calculation. I would suggest that historically, 20% of the annual revenue should exist as backlog. We have our revenue forecast for this year, making it an easy calculation.

Our next question comes from Nigel Coe from Wolfe Research.

Hi, good morning, everyone. Rich, a couple of points here: focusing on the caution you mentioned, it seems to be more about inventory and management levels than projects. Would it be correct to say the caution leans more towards CapEx, or do you find channel partners managing their inventory more tightly? How does that compare U.S. versus Europe?

I think it's a U.S.-centric observation. Our growth rate in Europe has outperformed expectations, considering the general caution about the situation there. Much of our production in Europe is recognized as revenue there, but it often goes international. I would categorize this as larger exposure in North America, so it is primarily a North American comment. I believe any necessary destocking in Europe probably occurred first during the previous year.

That's helpful. You also mentioned free cash flow being heavier in the first half of the year, which is unusual. You stated that most excess inventories are in materials, meaning they won't impact fixed cost absorption. I wonder if you expect there to be any margin penalty as you manage the inventory?

No. In fact, I believe it’ll be a margin credit as we liquidate it. If you consider forward-looking projections based on our inventory, such inventories should have been uniformly higher in cost. Indeed, our margin in certain sectors demonstrates this effect. Over the past few years, we've made significant investment in inventory to meet demand, leading to revenue growth exceeding expectations. As lead times and availability have improved, we’re enjoying a triple benefit: reducing excess raw materials we held to meet demand, decreasing production in Q4, and resulting in a pullback in payables.

That makes sense. Thank you.

Thanks.

Our last question comes from Julian Mitchell from Barclays.

Hi, good morning, and thanks for squeezing me in. Rich, you’ve mentioned mix as a factor a couple of times, and we’ve observed that in DPPS as well. I'd like to circle back to the DII segment. There was a mixed tailwind, I think, in the fourth quarter, coupled with a possible headwind in the year ahead, impacting margins. Could you elaborate on that? Additionally, DEP demonstrated exceptional margin expansion, albeit off an easier starting point. Is there significant movement around the mix in DEP?

In DEP, no. I recommend analyzing DEP sequentially rather than by comp. We’re all aware of what transpired in Q4 2022. That’s why we’ve stated not to worry, as price cost continues to roll forward. I would suggest looking at DEP’s performance as we move further into 2023. Regarding marking and coding, it depends on whether we ship more consumables or printers in any given period; more consumed means lower margins, while higher printer shipments imply heightened margins. We expect margins to remain robust overall, and we won't forecast decreases for 2023.

That’s helpful. Thank you. Finally, concerning Dover's overall operating margin, it seems the rate was somewhat flat in 2022 and guided to grow moderately in 2023. Given these benchmarks, is there an inclination to accelerate restructuring spend? I noted you have earmarked about $0.10 for 2023 after $0.20 last year. Do you think there’s room for stronger 2024 margin expansion, and would that require elevated restructuring this year?

Julian, while our margins were flat despite the decline of our biopharma sector—the most profitable segment—one could argue that once we overcome the destocking, expected in H1 2023, we should see improved margins leading to positive developments. All variables remaining constant, we will continue to enhance our portfolio balance. We expect steady growth in Climate & Sustainability while we anticipate DPPS will see growth as discussed. Returning to biopharma in the latter half of the year is expected, and that should assist our goals. We haven’t been overly ambitious in that estimate. Given the aforementioned points, we will continue to optimize fixed costs around here, and management is incentivized to deliver fixed cost reductions and incremental margins.

Thanks.

You’re welcome.

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