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1. FINAL TRANSCRIPT DOV - Q4 2006 Dover Corporation Earnings
Conference Call Event Date/Time: Jan. 31. 2007 / 8:00AM ET
www.streetevents.com Contact Us 2007 Thomson Financial. Republished
with permission. No part of this publication may be reproduced or
transmitted in any form or by any means without the prior written
consent of Thomson Financial.
2. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006 Dover
Corporation Earnings Conference Call CORPORATE PARTICIPANTS Paul
Goldberg Dover Corp. - Treasurer, IR Director Ron Hoffman Dover
Corp. - President, CEO Rob Kuhbach Dover Corp. - VP Finance, CFO
CONFERENCE CALL PARTICIPANTS Shannon O'Callaghan Lehman Brothers -
Analyst Steve Tusa JPMorgan - Analyst Ned Armstrong Friedman
Billings Ramsey & Co - Analyst Jack Kelly Goldman Sachs -
Analyst John Inch Merrill Lynch - Analyst Robert McCarthy Robert W.
Baird & Co. - Analyst PRESENTATION Operator Good morning and
welcome to the fourth-quarter and full fiscal year 2006 Dover
Corporation earnings conference call. With us today are Ron
Hoffman, President and Chief Executive Officer of Dover
Corporation, and Rob Kuhbach, Vice President of Finance and Chief
Financial Officer of Dover Corporation, and Paul Goldberg,
Treasurer and Director of Investor Relations of Dover Corporation.
After the speakers' opening remarks, there will be a
question-and-answer period. (OPERATOR INSTRUCTIONS). 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. Paul
Goldberg. Mr. Goldberg, please go ahead, sir. Paul Goldberg - Dover
Corp. - Treasurer, IR Director Thank you, Jackie. Good morning and
welcome to Dover's fourth-quarter earnings call. With me today are
Ron Hoffman, Dover's President and Chief Executive Officer, and Rob
Kuhbach, Dover's VP of Finance and CFO. Today's call will begin
with some comments from Ron and Rob on Dover's operating and
financial performance. We will then open the call up to questions.
In the interest of time, we kindly ask that you limit your
questions to one or two, with a follow-up. Please note that our
current earnings release and associated presentation can be found
on our Web site, www.DoverCorporation.com. This call will be
available for playback through 5 PM February 7, and the audio
portion of this call www.streetevents.com Contact Us 1 2007 Thomson
Financial. Republished with permission. No part of this publication
may be reproduced or transmitted in any form or by any means
without the prior written consent of Thomson Financial.
3. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006 Dover
Corporation Earnings Conference Call will be archived on our Web
site for three months. The replay telephone number is 877-519-4471.
When accessing the playback, you will need to supply the following
reservation code--8293040. Before we get started, I'd like to
remind everyone that our comments today, which are intended to
supplement your understanding of Dover, may contain certain
forward-looking statements that are inherently subject to
uncertainties. We caution everyone to be guided in their analysis
of Dover Corporation by referring to our Form 10-Q for a list of
factors that could cause our results to differ from those
anticipated in any such forward-looking statements. Also, we
undertake no obligation to publicly update or revise any
forward-looking statements, except as required by law. We would
also direct your attention to our Web site, where considerably more
information can be found. With that, I'd like to turn this call
over to Ron. Ron Hoffman - Dover Corp. - President, CEO Thanks,
Paul. Good morning, everyone. Thank you for joining today's
conference call. We apologize for a little bit of technical
glitches. We started the call early. Hopefully everyone can hear us
with great clarity. I'm pleased to report that Dover posted the
best fourth-quarter results in its history and for the year set new
records for earnings per share, sales, operating earnings, bookings
and backlog. We also made significant progress towards meeting each
of our Dover metric goals. As shown on slides 3 and 4, 2006 was a
great year for Dover with record revenue of over $6.5 billion, up
22%, and earnings from continuing operations of $603.3 million, up
35%. Earnings per share from continuing operations were a record
$2.94, up 34% over the prior year, easily surpassing Dover's
all-time record achieved in 2000. Five of the six subsidiaries
posted double-digit earnings growth for the year. In addition to
posting a 34% improvement in earnings per share, Dover also
increased its quarterly dividend by 8.8%, maintaining its 51-year
record of continuous dividend improvement, the fourth-longest
streak on the New York Stock Exchange. As announced this morning
and shown on Slide 5, Dover recorded its strongest fourth quarter,
posting record revenue of $1.7 billion, up 20% and generating
earnings from continuing operations of $156.1 million, up 28%,
resulting in a $0.76 earnings per share, up 27% relative to last
year. Rob will give you greater detail on the operational
accomplishments later in the call. These successful results were
driven by a number of strategic initiatives that we set for
ourselves at the beginning of 2006. The five key areas of strategic
focus which are highlighted on Slide 6 were, first, to complete the
portfolio rationalization process begun in 2005; second, to drive
operational improvements through our emphasis on
quot;PerformanceCOUNTSquot; and the five Dover metrics; third, to
key in on operating strategies that would drive organic growth;
fourth, to add new value-creating acquisitions; and last but highly
important, to continue developing the pool of talented employees to
fuel Dover's long-term success. We believe that we have
significantly delivered on each of these strategic initiatives. Our
subsidiary leader successfully completed the evaluation of our many
businesses and made huge strides in revitalizing Dover's portfolio
of operating companies. During 2006, 12 businesses were
discontinued and 8 were sold. Five of the discontinued companies
were highly volatile businesses in the technology segment. These
companies were predominantly capital goods businesses serving
lower-growth, narrow niche markets with limited recurring revenue
opportunities and in many cases were not capable of sustaining
Dover-like performance. These 12 companies represented annualized
sales of $780 million at 4% margins. Dover's portfolio is now more
focused on growth platforms that can deliver a higher and more
sustainable level of performance during the inevitable swings in
economic cycles. Even though we consider this portfolio evaluation
as significantly accomplished, the process will remain an aspect of
each subsidiary leader's responsibility. www.streetevents.com
Contact Us 2 2007 Thomson Financial. Republished with permission.
No part of this publication may be reproduced or transmitted in any
form or by any means without the prior written consent of Thomson
Financial.
4. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006 Dover
Corporation Earnings Conference Call Over the past two years, as
shown on Slide 7, the portfolio review process discontinued 20
companies with annualized revenue of $1.1 billion and margins of
about 5%. 14 of those companies have been sold, and the remaining 6
are expected to be sold in 2007. Those sales netted $605 million of
cash that was used to support the capital needs of our companies
and to fuel our acquisition growth. We are confident that this
process has significantly improved the quality of our portfolio and
has focused our energies on the future growth platforms of Dover.
Our quot;PerformanceCOUNTSquot; initiatives, driven by the five
Dover Metrics, have produced substantial and sustainable
improvements in Dover's operating companies. As highlighted on
Slide 8, Dover registered improvements in all five metrics. For the
year, our operating margins improved 110 basis points, annual
earnings growth was 35%, inventory turns improved to 6.5, and
working capital as a percent of sales declined by 180 basis points
to 18.9%, and the ROI of our operating companies rose to 27.5%.
Currently, 62% of Dover's revenue is at or above our 15% margin
metric and 36% of our revenue is generated in companies at or above
the eight inventory turn target. These improvements are moving
Dover to true world-class performance. The margin improvement and
working capital focus helped generate the cash flow in 2006 of $690
million or 11% of sales. While strength in many of our served
markets was helpful, we are confident that the focus on internal
excellence through our quot;PerformanceCOUNTSquot; program has
permeated our operating companies and will continue to drive
improvements going forward. 2006 was a very active and successful
year in adding new value-creating acquisitions. Dover invested a
record $1.1 billion on seven new acquisitions that reinforced our
commitment to building key growth platforms. In particular, Markem,
which closed the fourth quarter, and Paladin, our two largest
acquisitions, will enhance our product identification and
material-handling platforms. Both of these companies bring
significant product development capabilities, market leadership,
recurring revenue opportunities, and the scale to expand globally,
all of which should significantly enhance Dover's future. We also
added new companies with expanded products and technology to our
electronic test, ATM, screenprinting, and fluid-handling
businesses. For the year, acquisitions added 8% of our revenue
growth and after acquisition accounting, 6% of earnings growth.
Even with the record level of acquisition spending, Dover's return
on invested capital rose 110 basis points to 14.2%. As highlighted
on Slide 9, Dover has invested $2.2 billion in 17 acquisitions over
the past two years that add approximately $1.2 billion of sales at
Dover-like margins. We have been focusing our efforts on larger
companies with expanded product portfolios and unique technologies
that serve a diverse base of customers and end markets. Looking
forward, the acquisition pipeline remains strong with considerable
opportunities for additional growth. Acquisition spending is
targeted at roughly 10% of revenue, but with our strong cash flow
and available debt capacity, we are prepared to step up our
spending if a significant value-creating opportunity to complement
our growth platforms arises. As shown on Slide 10, Dover recorded
its fifth consecutive quarter with double-digit organic growth.
Fourth-quarter organic growth continued strong at 10% of revenues.
For the full year, our organic growth rate was 14%, significantly
above our industrial peers and a testament to the strategic
initiatives of our operating companies and their continual focus on
new product development, end-market expansion and customer-service
initiatives. In support of our organic growth initiative, a number
of our companies expanded their operations in Asia, Mexico and
Eastern Europe to serve new customers while seeking venues for
competitive cost advantage. We are very proud of our double digit
organic growth results and will continue to strategically focus on
this key growth vector. Succession planning and upgrading our
talent pool at all levels of the organization is another key focus.
We believe the autonomous Dover culture is very unique and
attracting and developing talent to sustain these traits is vitally
important. Many of our business leaders have developed focused
programs to prepare upcoming talent for future growth
opportunities. I am www.streetevents.com Contact Us 3 2007 Thomson
Financial. Republished with permission. No part of this publication
may be reproduced or transmitted in any form or by any means
without the prior written consent of Thomson Financial.
5. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006 Dover
Corporation Earnings Conference Call pleased to see the positive
results of these development efforts, as well as the increased
level of talent that joined the Company over the past year. Looking
ahead, we anticipate building upon the record performance of 2006.
The foundation of excellence set by our quot;PerformanceCOUNTSquot;
program, the revitalized portfolio of operating companies, as well
as the contributions from our new acquisition should deliver
another record-setting year. As always, we will face challenges as
we try to achieve these ambitious goals. Entering the year, our
backlog is up 21% over the prior year, and many of our groups, such
as Product Identification, Process Equipment, and Oil and Gas
Equipment, continue to exhibit strength and participate in healthy
end markets. We expect some early moderation in the end markets
related to construction, food services, and our electronics
businesses. As the year progresses, we anticipate an economic
climate which will enable Dover to deliver another year of strong
results and increased shareholder value. In 2007, we will continue
to refine our focus on growth platforms. Our strategic emphasis on
world-class performance standards, internal growth initiatives, and
focusing on larger acquisitions is driving a new era of growth and
improved results at Dover. In closing, I want to thank our 33,000
employees around the world whose tireless efforts drove these group
results. Their dedication to attainment of the five Dover metrics
and commitment to quot;PerformanceCOUNTSquot; is strongly
recognized and is driving increased value for our shareholders. I
am very proud of the 2006 accomplishments, and I am confident that
our employees are ready to meet the challenges of 2007. With that,
I will turn it over to Rob Kuhbach for an overview of our
subsidiary performance and financial highlights, before we open up
the call to your questions. Rob? Rob Kuhbach - Dover Corp. - VP
Finance, CFO Thanks, Ron. Overall, Dover's aggregate segment
operating results for the year were excellent. Relative to last
year, five of the six subsidiaries posted double-digit earnings
gains and all had double-digit margins for the first time in
several years. Operating margins improved 110 basis points to
14.9%, the highest level since 1996, which drove operating leverage
for the year to 20%. Resources was the overall earnings leader with
Electronics posting the largest earnings gain, generating the
biggest improvement in segment margins of 500 basis points.
Electronics and Industries posted sequential quarterly improvements
in sales, earnings and margin all year. Technologies' newly focused
portfolio of businesses posted a 260 basis point improvement in
margins. While the majority of the year-over-year earnings growth
came from the Electronic Components, Automation and Measurement,
Oil and Gas Equipment and Product Identification groups, the
earnings improvement was very broad-based with gains in 11 of our
13 market groups. Turning to each segment, on Slide 11, we show the
results for Dover Resources, where sales, earnings and margins were
all-time leaders at Dover. In fact, Resources set records in
revenue, earnings, margins, bookings, backlog, capital investment
and cash flow. Driving these results for the quarter and the year
was the Oil and Gas group, whose business has been and continues to
remain strong. We believe that, despite near-term moderation in
energy prices, the long-term prospects for this market are very
positive. Two other groups in Resources, Fluid Solutions and
Material Handling, had good years and quarters, although softness
in retail fueling, automotive and light construction, some
operational efficiency issues, as well as the short-term impact of
the Paladin acquisition, hurt margins, earnings trend and operating
leverage later in the year. In 2007, the oil and gas market should
continue www.streetevents.com Contact Us 4 2007 Thomson Financial.
Republished with permission. No part of this publication may be
reproduced or transmitted in any form or by any means without the
prior written consent of Thomson Financial.
6. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006 Dover
Corporation Earnings Conference Call to be robust, and 2006 capital
investment should drive further earnings growth and leverage in
this market. The automotive and light construction markets are
expected to be flat and with full-year improved performance from
Paladin, the rest of Resources should show improvement over 2006.
Slide 12 shows Dover Technologies, which was our second-most
profitable segment in 2006, showing great leverage, strong
year-over-year sales, earnings and margin growth. Within
Technologies, Automation and Measurement had a superb year.
Although its results moderated downward through the quarter,
margins held up very well. Fourth-quarter booking levels and
year-end backlog ended up flat with the prior year, reflecting
conditions in the semiconductor industry and seasonal electronics
industry trends. Second half 2006 back-end semiconductor bookings
suggest a moderating first quarter of 2007 compared to 2006. The
Product Identification group had a great year with sequential
improvements all year in sales, earnings and margins, including the
late-year Markem acquisition which had a negligible impact on 2006
results. Overall, markets remain strong and the prospects for 2007
are good, given the strong organic growth in 2006. That said,
significant Markem integration efforts will likely affect earnings
and margin levels during the year. Slide 13 shows the results of
Dover Electronics, which had a great year with sequential
improvements in sales, earnings and margins all year, largely
reflecting strong growth at all of the components companies,
particularly those serving the frequency controls and micro
acoustics markets. Given their relative size, the commercial
equipment companies made little contribution to year-over-year
improvement, as they had a mixed year with modest revenue growth
being more than offset by earnings weakness in the ATM markets. For
2007, components companies are expected to continue to show further
growth in their markets and improvements in the commercial
equipment companies should be additive. Slide 14 shows the
Industries' results, which was the fourth highest quarterly
earnings contributor for 2006, reflecting steady improvement
sequentially all year in sales, earnings and margins. For both the
quarter and the year, strong energy, military and transport markets
were the major factors. These same three end markets are also
expected to drive Industries' growth in 2007, despite some
anticipated short-term slowdown in the refuse market. Slide 15
shows Dover Systems, which had a solid year, driven by the
Foodservice Equipment companies which dominate this segment's
results. Overall, both Food Equipment and Packaging Equipment
groups had good years, subject to the customary seasonality of
demand and delivery which can affect this segment on a quarterly
basis, as happened again in this year's fourth quarter. While
commodity prices and short-term capacity constraints had some
impact on this segment during the latter half of the year,
corrective actions, together with continued strength in key served
markets, suggest that 2007 should be another year of growth and
improved performance. Slide 16 highlights Dover's Diversified
results which had modest improvements for the year and lack of
leverage for the fourth quarter, which overall reflects very strong
sales and earnings growth in the process equipment companies
serving the broad heat exchanger and energy markets, offset by
challenges in the industrial equipment companies, particularly
those connected to the Aerospace, MRO and construction agricultural
markets. With a record backlog, 2007 is expected to show meaningful
improvement as 2006 internal initiatives bear fruit, Industrial
Equipment companies recover, and Process Equipment companies
continue to expand. Here's some additional other key corporate data
as covered on Slide 17. For the fourth quarter, the impact of
Paladin and Markem acquisitions, including short-term acquisition
accounting, increased AD&A and [imputed] interest on purchase
price was about $0.03 negative to overall earnings. For the first
quarter of 2007, we expect that impact to be about $0.02 negative
and for the full year, the impact is expected to be neutral. 2006
capital expenditures were $195 million, up 49% or $64 million from
the prior year, reflecting significant investment in Oil and Gas
and Electronic Components groups. www.streetevents.com Contact Us 5
2007 Thomson Financial. Republished with permission. No part of
this publication may be reproduced or transmitted in any form or by
any means without the prior written consent of Thomson
Financial.
7. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006 Dover
Corporation Earnings Conference Call Turning to our capitalization,
Dover ended the year at a net debt-to-total capitalization of
26.8%, down from last year's level of 28.9%. This largely reflects
strong cash flow and divestiture cash proceeds resulting in a
modest increase in total debt. Our full-year tax rate was 26.7%,
consistent with the last two years and reflecting some late-year
adjustments for federal tax credit programs just enacted, as well
as favorable mix of foreign and domestic income. The fourth-quarter
rate was 22.6% versus last year's fourth-quarter rate of 25.6%. We
expect our 2007 rate to be in the range of 28%. With this overview,
let me turn the call back to Paul for questions. Paul Goldberg -
Dover Corp. - Treasurer, IR Director Thank you very much, Ron. With
that, we'd like to turn to Jackie who can queue up the questions.
QUESTIONS AND ANSWERS Operator Thank you. (OPERATOR INSTRUCTIONS).
Steve Tusa, JPMorgan. Steve Tusa - JPMorgan - Analyst Good morning.
Just first a quick question on Resources--you know, I noticed kind
of a sequential revenue increase was about in line with the
contribution from Paladin, but earnings were flat. I'm just
wondering if you could maybe discuss in more detail what the impact
from these acquisition step-up costs was in the quarter. Rob
Kuhbach - Dover Corp. - VP Finance, CFO Well, I think, in
Resources, we anticipate that there were probably at least a couple
hundred basis points of rate--of margin impact, almost 300 basis
points of margin impact because of the Paladin acquisition. So you
would have to look at their overall margins as actually being
improved in the fourth quarter, absent the Paladin acquisition.
Steve Tusa - JPMorgan - Analyst Okay. Are these one-time in nature
or is that just a mix from the Paladin acquisition? Rob Kuhbach -
Dover Corp. - VP Finance, CFO I think there are a couple things.
One, I think some of it is AD&A, short-term, because we bought
them late in August, so most of the impact from that was in the
fourth quarter. Some of it was acquisition write-offs, which were
short-term. Then the fact is their market tended to soften as the
quarter wore on because of the light construction market slowdown.
So it was really a combination of acquisition accounting and to
some degree their market condition. Ron Hoffman - Dover Corp. -
President, CEO I think, yes, Steve, I think the slowdown in the
light equipment, which is one of t heir nice mix areas, was
impacting. Also, they're moving some of their production to Mexico
and they are taking this cost on right at the front of the
acquisition. It's a part of www.streetevents.com Contact Us 6 2007
Thomson Financial. Republished with permission. No part of this
publication may be reproduced or transmitted in any form or by any
means without the prior written consent of Thomson Financial.
8. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006 Dover
Corporation Earnings Conference Call the integration we anticipated
in buying the company, and we will see that probably continue
through the first quarter of next year. Certainly, the acquisition
accounting issues are now behind us. Steve Tusa - JPMorgan -
Analyst I know you guys are longer-term investors but you know, was
this slowdown expected when you bought this business? You know, how
does this look throughout '07? Ron Hoffman - Dover Corp. -
President, CEO Well, we certainly were aware that there were signs
on the horizon of a slowdown in housing starts that would affect
light construction. At point in time, we certainly considered that
in our valuation as well as our implementation plans, so I don't
think it was a surprise, Steve. You know, how deep this is is still
I think open for discussion, but I think, historically, what we've
proven with Paladin or what Paladin has proven in their history, I
should say, is that typically they don't see the swings to the full
extent that the construction market might soften. They tend to be a
recurring revenue spend, where you are buying either buckets or
blades or mower decks or all of the various specialty devices they
make. I think, if you look at Paladin in general, certainly light
construction was down. Some of that is filtering into heavy
construction and some of the OEMs tend to back off in that area at
this point in time. But their demolition business is staying very
strong. The utility business is strong. In fact, I think their
utility business was at record levels in terms of bookings which
will flow into the first quarter, so again, a very broad-based
company. Yes, we bought it right as the light construction was down
the again, looking at it long-term, we are very comfortable with
this business where it's going. We think there's great integration
opportunities, and we think you'll see that reflected in their
performance throughout 2007. Steve Tusa - JPMorgan - Analyst Okay,
so using the fourth-quarter margin as kind of a baseline
as-reported is probably the wrong way to think about it; it's
probably a little bit higher when we think about the 2007 outlook
in margin? Ron Hoffman - Dover Corp. - President, CEO Absolutely.
Steve Tusa - JPMorgan - Analyst Okay. Lastly just as a follow-up,
you know, you talked about moderation in the first quarter. Does
that mean--I don't quite understand. Does that mean--obviously a
moderation in growth, but does that mean an absolute moderation
relative to the fourth quarter? How should we think about you
talking about a first-quarter moderation? Ron Hoffman - Dover Corp.
- President, CEO Well, I think, Steve, as we end the year, we
always have some seasonality issues. We normally see the
Electronics business tend to peak in the latter part of the year;
it rolls into the first quarter. I think it seeks what its new
level is going to be for '07, and in most cases, you have to get
past the Chinese New Year to get a good read on what's going to
happen in your Asian market, which is the driver of those
businesses. So, I think that's still a little bit unknown. There's
spots that tell us, from some of the bookings in the A&M group,
that there's a little bit of strength left in the market, but I
would say, overall, we're waiting on the semiconductor side to
weigh in and we just don't have a solid read on that yet.
www.streetevents.com Contact Us 7 2007 Thomson Financial.
Republished with permission. No part of this publication may be
reproduced or transmitted in any form or by any means without the
prior written consent of Thomson Financial.
9. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006 Dover
Corporation Earnings Conference Call I think also, you look at
seasonality as it affects the telecom sector and also the food
services sector--very traditional what Dover has seen these last
few years, and typically those are followed by pretty strong order
periods in the first quarter. We're just waiting to see all that
kick in. Steve Tusa - JPMorgan - Analyst Okay, so it's basically
seasonality plus maybe a little bit of incremental softening in
your end markets, so we can go back and look at first-quarter over
fourth-quarter performance in the last few years and kind of figure
out what you mean by that? Ron Hoffman - Dover Corp. - President,
CEO Yes, I think the related construction-related businesses which
impact, again, the material handling sector of Resources is
certainly a bit on a decline, and I think that has been the impact.
I think, ironically, you know, a question might beg about the
performance of the oil patch when you consider that we've seen oil
prices slow, but our activity levels in that arena stay very
strong, robust, a little bit of slowdown perhaps in Canada but not
really affecting our businesses yet, just seeing the pace of
activity slow there a little. Steve Tusa - JPMorgan - Analyst So
still up nicely over last year but just down sequentially? Ron
Hoffman - Dover Corp. - President, CEO Absolutely. I think the
pattern that you saw at the end of '04 to '05, where the first
quarter was below fourth quarter of the prior year, is what we're
more likely to see than what happened from '05 to '06 where the
first quarter exceeded the end of '05. Steve Tusa - JPMorgan -
Analyst Okay. Okay, great. That's very helpful. That should be your
toughest comparison of the year I would think. Ron Hoffman - Dover
Corp. - President, CEO We are hopeful that's the case. Steve Tusa -
JPMorgan - Analyst Looks pretty good to me. Thanks a lot. Operator
Ned Armstrong, FBR & Co. www.streetevents.com Contact Us 8 2007
Thomson Financial. Republished with permission. No part of this
publication may be reproduced or transmitted in any form or by any
means without the prior written consent of Thomson Financial.
10. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call Ned Armstrong - Friedman
Billings Ramsey & Co - Analyst Thank you, good morning. You
alluded to the growth platforms that you [attacked] the acquisition
over '05 and '06, and it was Oil and Gas, Electronic Test, Product
ID, Material Handling, Electronic Components. Are those platforms
continuing to be your main targets? Is there any shift of emphasis
within those platforms as far as what you're targeting? Ron Hoffman
- Dover Corp. - President, CEO Certainly, Ned, we've exhibited,
through the last two years, that's where we've been spending the
lion's share of our acquisition dollars, building those. Some of
that is not only our focus on the sectors but just the properties
that happen to come available. We were able to acquire Markem
certainly at the end of the fourth quarter, which I think was an
area of focus for us to exhibit strength in the product ID market
that we feel has better-than-normal growth rates. What we think now
that has established us with probably the broadest portfolio of
product ID equipment in the marketplace. We would also say that
certainly oil and gas--there's been some technology opportunities
come available there that we think strengthen our posture in that
way. I think, as we look at Dover in total, we spend a lot of time
now evaluating our portfolio to define where are the businesses
that we distinguish ourselves from a performance, from a
market-coverage standpoint, sustainability of earnings. So I think
we are becoming a little bit more focused company. We're not just
looking at everything that comes over the transom; we're looking at
those things that we think we can identify value and in areas that
we truly understand the market well. Rob Kuhbach - Dover Corp. - VP
Finance, CFO You know, I think you'll see, over the next quarter or
two, that we're going to continue to be focused in the areas that
Ron identified in his Slide 9 because I think those are areas
where, as he said, we think we've developed some expertise and some
in-depth understanding of those end markets and customers to where
we can continue to get some leverage out of expanding our presence
in those spaces. Ned Armstrong - Friedman Billings Ramsey & Co
- Analyst So I can interpret your acquisition strategy as being
really capitalizing on where you believe you're strong, so maybe
more focused than it has been in the past? Ron Hoffman - Dover
Corp. - President, CEO Well, I think yes, Ned, that is the right
way to summarize it. However, we always hold the caveat that if
there's a new opportunity that comes about that takes us into a new
market that we think will create shareholder value and give us
another growth vector, we will certainly evaluate that also. But we
are trying to become much more focused in our acquisition spending.
Again, because we're doing larger deals. We have to understand
those deals much better and we need to know the end-market impact
and be able to kind of track what we think the trends are,
long-term. Ned Armstrong - Friedman Billings Ramsey & Co -
Analyst Okay, good. Thank you. Operator Jack Kelly, Goldman Sachs.
www.streetevents.com Contact Us 9 2007 Thomson Financial.
Republished with permission. No part of this publication may be
reproduced or transmitted in any form or by any means without the
prior written consent of Thomson Financial.
11. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call Jack Kelly - Goldman
Sachs - Analyst Good morning, Ron. Just one broad question, Ron, in
terms of the acquisitions that were completed in '06 and the
dilutive impact they might have had. Can you just give us a feel
for what the dilution was in aggregate for '06, for the '06 deals
and what the swing factor might be in '07? So, they diluted--making
up numbers, they diluted by $0.06 in '06 and they're going to
contribute $0.15 in '07. Rob Kuhbach - Dover Corp. - VP Finance,
CFO I think, if you're talking about the acquisitions completed in
'05 and their impact on '06, we can talk about that. I think if
you're talking about the ones we completed in '06, you know, I
commented on those, Jack. We basically feel that the ones, really
Paladin and Markem, are going to be relatively neutral in '07. I
think we obviously benefited from Knowles and Kohler in '06 to the
extent of about I think roughly $0.08 to $0.10 is what we indicated
and we probably achieved that all in for '06. I think we're going
to continue to see contribution from the '05 transactions in '07,
and I think the '06 transactions basically will be neutral to '07.
Jack Kelly - Goldman Sachs - Analyst After being diluted by $0.06
in '06? Rob Kuhbach - Dover Corp. - VP Finance, CFO Well, I think
we estimated the dilution in '06 at about $0.04 for the quarter.
For the year, actually, for the whole year, I think the dilution
impact was about--most of that was in the fourth quarter but I
would say that the whole-year impact was $0.04 in the third
quarter, the fourth quarter was $0.03 of the $0.04. Ron Hoffman -
Dover Corp. - President, CEO Is that clear? Jack Kelly - Goldman
Sachs - Analyst Yes, so we are going from -4 to a push in ]07? Rob
Kuhbach - Dover Corp. - VP Finance, CFO Right. Ron Hoffman - Dover
Corp. - President, CEO I think the contributions that we saw so
fast coming from Knowles as we look to integrate Markem and
Paladin, certainly with Paladin, we acquired a company that really
was kind of a roll-up of a number of acquisitions and the
integration work really hadn't been completed, so we will absorb
some costs to finish that integration move during the course of the
year to optimize their performance. And really the same applies
with Markem. Again, we bought a wonderful company there, but we
have a significant play in Product ID with Imaje and the other
companies we own. We have to look for, let's say, the Best
Practices or best ideas in the group. That will take some time to
ferret through that. That is in-process currently but there will be
some costs and some transition expenses in that sector until we get
that optimized. www.streetevents.com Contact Us 10 2007 Thomson
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12. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call Jack Kelly - Goldman
Sachs - Analyst Just on Foodservice, in the fourth quarter,
revenues were up 18%. I assume that reflects kind of a rebound for
Hill Phoenix, which was I think down in the third quarter. But then
in your comments, Ron, in the press release talking about the first
quarter, you talked about softness in end markets and Foodservice
was cited. So is this another--going to be another--the first
quarter is going to be another lumpy quarter for Hill Phoenix after
recovering in the fourth quarter? Ron Hoffman - Dover Corp. -
President, CEO Well, I think, Jack, we normally see a change of
seasonality that impacts Hill Phoenix as to new store
constructions, rebuilds of existing stores, so I think the impact
of that always takes some time to be defined. I know that Hill
Phoenix is talking with a number of their customers about their '07
requirements. They're getting greater clarity on that I think
weekly in those dialogues. I think also some of their new
technology of sustainability is really catching a lot attention.
Some of their new CO2 capabilities as well as their second-nature
coolant. In some cases, I think some of the customers are deciding
if they want to invest in the new technology versus traditional
technology, and that's a bit of a valuation process. We're pretty
excited about those new technologies and what they're going to do
for Hill Phoenix's performance in the marketplace. Rob Kuhbach -
Dover Corp. - VP Finance, CFO I think it's safe to say, Jack, that
our fourth quarter this year in that space, food equipment, was
higher than last year's fourth quarter. We ended up the year not
only on a revenue basis but on an earnings basis, we got some
leverage in that sector. We continue to think that's going to play
out, but the first quarter in that business generally is always
softer than the second and the third, which are traditionally very
strong. So in fact the normal pattern is that there is a pickup. We
ended the year, I think, with a higher backlog than we did a year
ago. So we think that portends to a decent quarter. But you're
going to see most of the improvement, most of the normal gains in
that whole space really show up strongly in the second and third
quarters. So this is nothing unusual as far as we are concerned.
Jack Kelly - Goldman Sachs - Analyst That's what I was trying to
pick up on. And so the comment in the press release is a seasonal
one, but you mean year-over-year-- Rob Kuhbach - Dover Corp. - VP
Finance, CFO Correct. Jack Kelly - Goldman Sachs - Analyst --we're
dealing with same seasonality, so year-over-year Hill Phoenix
should be up but just don't expect the kind of performance that we
maybe saw in the fourth quarter, which is probably a rebound-kind
of quarter. Rob Kuhbach - Dover Corp. - VP Finance, CFO Right, and
I think there are some other initiatives that we were taking late
last year that we're going to see some additional benefit of,
probably more again seasonally in the second and third, having to
do with commodity prices and frankly gaining some traction in our
markets where we think appropriate to recover that kind of issue.
www.streetevents.com Contact Us 11 2007 Thomson Financial.
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13. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call Ron Hoffman - Dover
Corp. - President, CEO Actually, Jack, we never welcome a pullback
in business but I think it has allowed Hill Phoenix also to
complete some construction and rearrange them in their plant to get
ready for the next business upturn. They had been delaying that
most of the year because they were so busy they couldn't finish
their rearrangement of the new plant expansion in Virginia. So I
think it's kind of good that they are able to absorb some of that
now so they can get ready for the next layer of capacity. Rob
Kuhbach - Dover Corp. - VP Finance, CFO I mean, keep in mind, they
had a huge increase in revenue, well over 20% year-over-year, from
'05 to '06. That inherently led to some challenges in terms of the
capacity and meeting those customer demands. I think it has given
them an opportunity to kind of catch their breath and be ready to
roll on a bigger scale for '07. Jack Kelly - Goldman Sachs -
Analyst Just final question, Ron, in terms of your metrics with
regard to O/I margin, you're basically right there, meaning 14.9
versus the 15. You know, as you think about continuing to raise the
bar, you know, we expect some time during the first half of '07 for
you to increase that metric from the 15% level? Ron Hoffman - Dover
Corp. - President, CEO Thanks, Jack, for acknowledging the 14.9 is
right near 15. That box should have been colored green but
sometimes we are very succinct. Anyhow, I guess, as I look at that,
Jack, you know, all of our companies don't see 15% as a stopping
point. Our companies will always optimize their performance. I
think that we still have companies that the 15% is a target they're
working towards. Those that are at 15% are not stopping there; they
are continuing to redouble their efforts and I think we've seen
that across the board. Will we look at raising that target? Perhaps
there will be a time, Jack, that we will visit that. At this point,
we think that's still very much in line with what you'd call
world-class performance companies, so it's not something that we
are in the process of moving currently but it is something we are
discussing at the executive level. Jack Kelly - Goldman Sachs -
Analyst Because basically, given your comments about this year, you
know, it's pretty clear you're going to exceed that, based on, you
know, the backlogs, the margin improvement, etc. So it would seem,
at some point here, it just makes sense to raise it, but anyway, we
will pass the baton onto the next person. Ron Hoffman - Dover Corp.
- President, CEO It does take lots of work, Jack. It's not that
easy but nonetheless, I appreciate the confidence that we will
exceed it. I agree with you. Operator John Inch, Merrill Lynch.
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14. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call John Inch - Merrill
Lynch - Analyst Good morning. I'm wondering if we can get a little
more direct on some of these questions. Hill Phoenix, if I go back
to last quarter, my understanding was that a certain large customer
that begins with 'W' had pushed out some orders. Has that come
back? It sort of sounds like not necessarily if you're suggesting
first quarter, although seasonally sort of softer but you're kind
of looking for improvement in second and third quarters. Could you
talk a little bit about that and what's going on there? Ron Hoffman
- Dover Corp. - President, CEO I can't speak to the inner workings
of Wal-Mart's demand, but I can't say that they have reshuffled
some orders around. Some of this push-out did shift in the fourth
quarter, but other orders were moved to different periods, so
they've kind of shuffle their whole order base. Some of this is, I
think, a reaction to some of their comments about pulling back on
their growth vector of store announcements. But again, John, I
don't think you can over-read too much into the fourth quarter. We
still see that market as coming back, probably in the second
quarter pretty strong, and we like the inroads we're making with
some of the technology. But quite candidly, there has been some
removement of orders but nothing that we are concerned about at the
moment. John Inch - Merrill Lynch - Analyst (technical difficulty)
then is basically kind of tracking--let's put it this way. Is the
trajectory for '06 with that customer kind of coming out where you
would have thought prior to the third quarter's push-out? Ron
Hoffman - Dover Corp. - President, CEO Yes. In fact, I guess we are
a little bit encouraged by some of the wins and the technology
(indiscernible) that we're getting from some of those customers
also, so we're feeling comfortable there. John Inch - Merrill Lynch
- Analyst Okay. I wanted to flush out Resources a little bit. It's
something about mislabeled segment. If you look at your oil and gas
business, you know, there's kind of a rig count abatement trend and
softening; there's certainly gas questions in North America. I know
this business is kind of majority North America. Could you talk a
little bit about sort of what kind of a growth rate trajectory you
see? I mean what sort of a scenario is baked into that and why
should we not--considering how strong this business has been--not
be concerned, particularly given the trend of energy prices, gas
prices, kind of rig counts, that sort of thing? Ron Hoffman - Dover
Corp. - President, CEO Well, I think, again, gas prices, or let's
say commodity prices, we could debate that all day long as to how
much of that had premium versus real cost. I think what we see is
certainly we've seen a change in the relationship of gas prices to
oil prices. I think that also as we started the winter with a much
warmer winter, I think we were concerned about the use natural gas,
what impact that might have on drilling going forward. The only
sector right now that we're reading a lot about in terms of
potential downturn is Canada. We are seeing a change in--or let's
say a pullback in the issuance of new permits in Canada, mainly
related to gas wells. We also are heading into what we call the
breakup season in Canada, so we expect that sector to probably be
off a little bit in the first quarter. When I say off, again, we
were running at an extremely high rate last year, so I'm talking
rate of rate of growth more than physical pullback of actual
numbers. www.streetevents.com Contact Us 13 2007 Thomson Financial.
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15. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call I think, if you look at
our thinking as we roll into 2007 and looking at the optimism of
the business leaders and kind of how they reported, they still are
showing significant growth forecasts there. I think some of our
companies, again like our companies that make diamond inserts,
continue to be gaining market share in that technology versus the
traditional technology of roller cones. I think some of our
technologies on sensors, hide high-pressure, high-temperature
sensors is getting a global perspective, an additional business
pretty much from the standpoint that some of the stuff is going
deeper and offshore and that kind of plays into both of these
companies' technologies going forward. We also kind of look at rig
movement, which affects some of our other companies like Tulsa
Winch and people like that. Their order rates continue to stay very
strong. They had a great year. Their rates are strong which means
there's still a demand for equipment in the Permian Basin as well
as Canada in that particular regard. So the signals we get are
still pretty strong. We're reading the same signals you are of
looking at commodity prices and some of the permit requests and
we're looking at a very cautious side. But incoming order rates,
the diversity of the businesses we have still (indiscernible) very
strongly in that sector. We're still encouraged by the growth
opportunities in '07 in that sector. John Inch - Merrill Lynch -
Analyst So Ron, do you think, even with Canada, this business can
be up kind of high double digits, the way it was, perhaps a little
bit of moderation? Ron Hoffman - Dover Corp. - President, CEO Well,
I think you have to keep in mind, you know, last year was a huge
gain and to be able to support that kind of a gain year-over-year,
just the numbers get awfully large on us. But I think we will see
it certainly. At this point, we see strong double-digit growth.
John Inch - Merrill Lynch - Analyst Okay. My other question is just
on leverage, Ron. It sort of follows Jack Kelly's question. If you
kind of flip through the presentation and some of these businesses,
if you look at the change in revenues versus earnings, you know,
oil and gas kind of matched; fluid seemed to see deleveraging; you
had strong automation leverage; components had strong leverage,
some negative leverage. I mean, it kind of is a mixed bag in terms
of sort of the impact on earnings in terms of the revenue deltas.
How should we think about, based on that, what you think the
potential is for Dover in terms of margin runway from present
levels? I'm not holding you to an '07 number. I'm just more
thinking, how much more juice out there--is there in these margins
and how should we maybe be thinking about realizing some of that
benefit in '07? Are we talking about a couple of points more before
peak or how would you like us to think about it? Ron Hoffman -
Dover Corp. - President, CEO John, I kind of heard you start your
question relative to Resources and then you broadened it to Dover
in total through the question, so are you speaking really to
Resources or Dover in total? John Inch - Merrill Lynch - Analyst
I'm sorry, Ron, I was just talking Dover in total but trying
to--you know, if you just flip through the segments, it's a little
bit mixed in terms of the sort of realized leverage that you saw in
the fourth quarter. Sometimes the revenues and earnings match in
terms of the growth rate; sometimes you get more bottom-line
leverage, sometimes less. How would you like us to think about kind
of how much juice you think there are in margins overall and then
maybe what we can look forward to in '07? www.streetevents.com
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16. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call Rob Kuhbach - Dover
Corp. - VP Finance, CFO John, this is Rob. I think a couple of
things to keep in mind. I think ,in some cases, these businesses
have had significant growth in demand and to some degree, their
lack of leverage in the near-term reflects the need for them to
frankly expand capacity and be able to meet some of the customer
requirements. If you think about Resources, I think they probably
consumed almost a third of our huge CapEx budget this year. So, I
think the relative lack of leverage, although their margins and
their growth rates are at high absolute levels, reflects the fact
that they've had to make investments that includes US Synthetics,
Quartz (indiscernible) a number of companies in their resource base
in particular, but Hill Phoenix has put capacity in. I mean, a
number of companies are now in effect recognizing that they are
operating at a higher absolute sales revenue level, so they've been
making investments, which has tended to moderate the leverage that
you would normally expect to see. So I guess, in my mind, you're
going to see sort of a resumption of I think some leveraging. I
think most of the markets they are in are very strong right now.
There still is opportunity, but I think they are operating at a
relatively higher level than you would have seen a year or two ago.
So I think there is still room for improvement on margin,
particularly at some of the companies that have been a
disappointment as some of these areas that you identified as
pockets of relatively lower performance. So, I would say, overall,
we think there's still margin opportunity, and to some degree, we
are going to get that from the fact that we put a lot of capital
into some of these businesses that's going to pay off. Ron Hoffman
- Dover Corp. - President, CEO John, let me give you a little bit
additional clarity maybe without trying to be overly directive
here, but certainly think there's opportunities to improve the
margins in Diversified. We think there's some unique issues in
Diversified that are being responded to. I think the pullback in
the construction market that impacts our (technical difficulty)
businesses is something we would like to see turn. But I think some
of the Aerospace business, some of the improvements we are seeing
in our heat exchanger business lead me to believe that diversified
certainly can perform better in '07 than it did in '06. If I look
at Electronics, which had some nice growth certainly relative to
the impact of the business at Knowles, I think we will see
continued growth at Knowles that will continue to impact that
sector. I think we had some tough, a tough year in the ATM business
and we will see how that rolls out into '07. Hopefully, we will
continue to see some improvement and gain there. I was very pleased
with Dover Industries, who posted quarter-to-quarter improvement in
margins and performance across the year. I think that's a
nice-headed momentum in that group that hopefully can be
maintained. If we look at Resources, again we can talk about knits
and knats and Resources and mix, but if you look at that, that
whole subsidiary, which is our largest earnings group, is running
in a very narrow band of margin. It's almost in 1% if you look at
the whole quarterly spread, so again, very good, solid performance
there, again with the only change being that with Paladin coming
in, that will have some negative pullback on the Material Handling
margins until we will get all the integration moves completed. If
you look at Systems, again, I think we will see a good strong year
there, very similar to what you've seen in the past year. With
Electronics, you always have the A&M market that is a little
harder for us to predict and call because it's going to depend on
the level of the capital demand as it impacts our handler business
in the group. So I think the recurring revenue side of that, which
is a high POGO replacement, pin, fixture-replacement side, should
hold well. I really see our product identification business
being--continuing to gain strength. With the integration moves we
will make with the Markem acquisition over time, I feel that's
going to be a very nice long-term play for us. www.streetevents.com
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17. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call John Inch - Merrill
Lynch - Analyst Yes, that was very helpful color. Thank you, Ron.
Lastly, do you guys ever think about maybe changing out some of
these segment names? You know, Industries, Diversified,
Systems--it's sort of--even Resources, it's kind of a little bit
non-intuitive when you think about the businesses inside of it. I
don't know, just to perhaps improve upon the clarity that you've
already improved upon since becoming CEO! Ron Hoffman - Dover Corp.
- President, CEO You don't have a speaker on the wall at our
executive meetings, do you, John? John Inch - Merrill Lynch -
Analyst (LAUGHTER) Ron Hoffman - Dover Corp. - President, CEO
Certainly, we challenge ourselves with that on all occasions. I
think one of the challenges we have is we've turned around the
portfolio. We think we are more focused; we think we will continue
to look at, you know, are we portraying Dover in the best light
with the greatest clarity? We will see what develops in '07 in that
regard. John Inch - Merrill Lynch - Analyst Okay, well, I won't
file away my eyechart just yet. Thanks very much. Operator Robert
McCarthy, Robert W. Baird. Robert McCarthy - Robert W. Baird &
Co. - Analyst Good morning, guys. I really just need to follow up
on a couple of things that have already got a fair amount of
attention. In your comments, Ron, about Resources just as you were
just talking about the expectation for somewhat slower growth in
'07 but still solid, double-digit, it wasn't clear to me whether
you were speaking about Resources in its entirety or just the Oil
and Gas Equipment group specifically. Ron Hoffman - Dover Corp. -
President, CEO I think the dialogue was more related to oil and gas
as we were having that and talking double-digit growth. I think
Resources certainly is forecasting growth. They've posted
double-digit growth the last few years. I'd like to think that they
will have that opportunity but I don't think I want to go out and
say that yet. Robert McCarthy - Robert W. Baird & Co. - Analyst
Okay, fine. (multiple speakers) www.streetevents.com Contact Us 16
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18. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call Ron Hoffman - Dover
Corp. - President, CEO Subject only to the fact that you've got
Paladin coming in, so you're going to see some inherent growth
because Paladin eventually will become organic. You're going to see
that, what I will call natural shift, so you may still see
double-digit growth in Material Handling revenue just because of
the addition of Paladin. Rob Kuhbach - Dover Corp. - VP Finance,
CFO Yes, I think that is a good clarification because it isn't
impacting acquisition. Robert McCarthy - Robert W. Baird & Co.
- Analyst Absolutely. If I'm reading between the lines correctly,
do I understand that Material Handling group had a down quarter
without the impact of the acquisition? Ron Hoffman - Dover Corp. -
President, CEO Well, certainly, again, light construction did
impact a number of businesses in that group, plus automotive. Keep
in mind that, in that group, what little bit of automotive content
we have in Dover pretty much shows up in that group. That sector
has been down and stayed down. I think we've seen the slide of
light construction impact some companies in there but it's been
offset, again, by some nice business games at Tulsa Winch. So in
general, I think you are right; we have seen just a flat to slow
market overall in that sector. However, I guess I would also say,
though, that the sector down there, absent Paladin, really wasn't
too bad in terms of order rates and overall earnings--excuse me,
overall revenue. Robert McCarthy - Robert W. Baird & Co. -
Analyst Okay, thank you. That's helpful. I would assume, as you
look towards 2007, you are thinking in terms of the Material
Handling group, given likely auto production schedules, some
ongoing pressure on light construction, that the first half of the
year is probably significantly weaker on a year-to-year basis than
the second half will be. Ron Hoffman - Dover Corp. - President, CEO
Right now, I think, because of the light construction, it might
filter into heavy construction if we don't see that turnaround come
in the spring when you'd expect the building season to improve.
That could be the case. But again, most of this is pretty short
leadtime business, Rob, so you don't get the long backlogs in that
sector that we might in some of our other businesses. So the change
will come about probably pretty quick and be reflected for a large
amount in the same quarter as we receive it. Robert McCarthy -
Robert W. Baird & Co. - Analyst Okay, very good. To follow up
on your comments about Technologies, particularly Automation and
Measurement, I guess. We are--moderating first quarter means down
compared with prior year, right? Ron Hoffman - Dover Corp. -
President, CEO Well, in the prior year, we actually starting with a
better backlog at off of a better base of orders. In fact, we had a
few of our companies that--again, I'm going to use a technical term
here--the manufacture flying prober which is a test device that had
booked some all-time highs actually in the fourth quarter, so you
get a lot of diverse signals. www.streetevents.com Contact Us 17
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19. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call But I would say,
sequentially, we should see that business show the same pattern as
it has in the past that we would expect to see pickup after Chinese
New Year to impact the second and third quarter with some drifting
probably in the fourth quarter, again absent some major consumer
electronic device. That puts a whole level of demand out there in
the marketplace. Robert McCarthy - Robert W. Baird & Co. -
Analyst Okay. I certainly understand the picture you're painting
for the entire year, but I'm still a little bit confused about the
first-quarter outlook down sequentially but I hear you saying not
necessarily down compared with prior year. Ron Hoffman - Dover
Corp. - President, CEO That would be a reasonable assumption.
Robert McCarthy - Robert W. Baird & Co. - Analyst Okay. Lastly
if I may, could you comment on the issues in the ATM market in the
quarter and to what extent you see those as temporary, and whether
they are related at all to--through the, you know, bank initiative
or not? Ron Hoffman - Dover Corp. - President, CEO Well, I think,
Rob, our comment there would be we saw let's say slower growth or a
slower market in the U.S. ATM retail market, which is where we have
exhibited the most strength. Robert McCarthy - Robert W. Baird
& Co. - Analyst Yes, the core market. Ron Hoffman - Dover Corp.
- President, CEO Yes. The growth that we are seeking in the banking
market, we are continuing to see strides in improvement in that
market, but again, that's slower in coming because these are in
bigger blocks and you have to prove your ability to perform in that
area, so you put out trial ATMs and they have to go through their
tenure of being accepted by those major banking institutions. I
think are we encouraged? Yes. Is it slower than we would hope? Yes.
But I think we're still pretty optimistic about what's going to
happen to that sector over time. Robert McCarthy - Robert W. Baird
& Co. - Analyst So to what do we attribute the slowing in the
core business in the quarter? Is this slower construction activity
in some of their key markets like [C] store and gas station? Ron
Hoffman - Dover Corp. - President, CEO I think that is the case. I
think we're trying to kind of get a feel of what is the saturation
point of ATMs in these retail outlets. I think we're seeing that
industry has built out an awful lot over the last few years, and
now it's a question of what's the magnitude of the replacement
market? www.streetevents.com Contact Us 18 2007 Thomson Financial.
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20. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call Robert McCarthy - Robert
W. Baird & Co. - Analyst Okay, thanks. Very helpful. Operator
Shannon O'Callaghan, Lehman Brothers. Shannon O'Callaghan - Lehman
Brothers - Analyst Good morning, guys. Just a higher-level question
I guess on organic growth, still very strong in the quarter, sort
of a natural moderation over the course of this year. How are you
thinking about '07 for organic growth? Ron Hoffman - Dover Corp. -
President, CEO Well, I think certainly, mathematically, the number
is down in the fourth quarter from what it was. If you look at our
average (technical difficulty) but I think, Shannon, anybody that
can post double-digit growth five consecutive quarters, that's
really a testament to what's going on inside those companies. So I
think I would hope everybody would interpret that that we're not
just buying growth; we are actually developing growth internally
into our companies. I think looking forward, I think we will
continue to see organic growth. We've historically said that
organic growth target was 5 to 7%. We would think that it would
probably be at the high end if not exceeding that through the
course of the year. Whether it will maintain double digits all year
I think is a little early to call, but we're pretty comfortable
with our organic growth initiatives going forward. Shannon
O'Callaghan - Lehman Brothers - Analyst Okay. You know, you
mentioned, on Paladin and I thought you said it on semi, too, some
moderation over the course of the fourth quarter. I mean, how are
you guys, given your sort of broad exposure, how are you feeling
about the economy? Ron Hoffman - Dover Corp. - President, CEO
Actually, the economy, again, we think is still holding in pretty
robust with just the exceptions that we noted in our dialogue. But
in general, we are not seeing order rates or business trends that
are scary to us. We anticipate some of the pullback you saw in the
second half of the year is going to come back in its normal,
seasonal fashion. So we're really still pretty optimistic. I think,
if you look the broad base of companies we have and the markets we
touch, we are getting a pretty solid read and it's not a negative
read. In fact, I would say, on-balance, it's more positive than
negative. Shannon O'Callaghan - Lehman Brothers - Analyst Okay. You
know, just I guess the last one, you made the comment on
acquisition spending of 10% of revenue but you're willing to go
higher. You know, what drives that comment? Are you seeing things
out there that are bigger that you are thinking of going after, or
I mean why would you sort of start to think higher than that now?
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21. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
Dover Corporation Earnings Conference Call Ron Hoffman - Dover
Corp. - President, CEO Well, I think, again, when you think of 10%
of revenue of Dover and, let's say, just roughly $7 billion of
(indiscernible) or something, 700 million in spending after two
years at 2.2--or excuse me, 1.1 billion in each year, I think it
says our appetite is out there to look at bigger deals as they come
across as opportunities. So we're just saying that we have plenty
of debt capacity. Our earnings are generating a lot of cash for us,
in terms of balance sheet are generating cash. We are going to
deploy that into our acquisition program. I think now that we're
more focused, we're going to be able to kind of identify where
those true value-building opportunities are going to be for us. If
there is one that we have to reach for, we're willing to reach.
Shannon O'Callaghan - Lehman Brothers - Analyst How about on the
divestiture side? I mean, could some of that be funded through the
sale of something else? Ron Hoffman - Dover Corp. - President, CEO
Well, again, we feel like most of the divestiture activity is
behind us. We have a few smaller ones to finish cleaning up yet,
but I think the gain of cash off of those will not equal what we
posted in the past so we won't get as much cash back from that
activity. But again, you know, our debt equity has peaked up into
the low 30s as we've done major acquisitions, but with the cash
generation, we've been able to pull not only from the acquisitions
but just the portfolio of our companies now that we've optimized
it. You know, we get that back down into the mid-20s pretty fast.
So I think we are very comfortable with our capacity going forward.
Shannon O'Callaghan - Lehman Brothers - Analyst Okay, well, thanks
a lot, guys. Operator Thank you. I would like to turn the call over
to Ron Hoffman for closing remarks. Ron Hoffman - Dover Corp. -
President, CEO Again, I would like to thank everyone for being on
the call and the questions they asked today. Hopefully, we've
provided some clarity to help you think of Dover on a go-forward
basis. Again, I would like to just draw attention to the fact that
I think this portfolio work that we essentially completed over the
last two years has significantly changed the outlook for Dover, the
growth potential for Dover. We think it has allowed us to focus our
energies and has certainly been reflected in our results. It also
reduces the volatility of Dover that we've exhibited historically.
We are very comfortable that we are poised to continue to deliver
shareholder improved results over the coming year. With that, we
will close our call. Operator Thank you. This concludes today's
Dover Corporation conference call. You may now disconnect.
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22. FINAL TRANSCRIPT Jan. 31. 2007 / 8:00AM, DOV - Q4 2006
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