Vontier Corporation Common Stock

My name is Brittany, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Volunteer Corporation's fourth quarter 2021 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin your conference.

Thank you, Brittany. Good morning, everyone, and thank you for joining us on the call. With me today are Mark Morelli, our President and Chief Executive Officer, and Dave Nomura, our Senior Vice President and Chief Financial Officer. We will present certain non-GAAP financial measures on today's calls. Information required by SEC Regulation G relating to these non-GAAP financial measures is available on the investor section of our website, www.vonteer.com, under the heading Financials. Please note that unless otherwise noted, the presented financial measures reflect year-over-year increases or decreases relative to the supplemental normalized financial data also posted on the website under the heading Financials. During the presentation, Lily described certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings and subsequent annual report on Form 10-K. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Mark.

Thanks, Lisa, and good morning, everyone. The fourth quarter closed out a defining year for Vontir. Our team delivered another strong quarter ahead of earnings expectations. Continued focus and execution positions us well for long-term success. Before moving into the details of the quarter, I'd like to review the important progress we're making to drive portfolio diversification and unleash earnings growth potential. I'm pleased to report that we've met or exceeded plan and 2021 expectations in all areas. The team delivered a strong finish to the year in the face of an exceptionally challenging environment and an EMV top line headwind of roughly $100 million. Full year 2021 adjusted earnings per share of $2.88 grew 17%, driven by 6% sales growth which includes 7.4% core revenue growth and 160 basis points of adjusted core operating margin expansion. Excluding the EMV headwind, core growth for the full year was approximately 15%, a testament to the team's unyielding execution. In addition to delivering double-digit earnings and top-line growth, we delivered adjusted free cash flow conversion of 96% for the year or 102% when excluding the extra tax payment related to the SPIN. Our cash performance is one of the financial hallmarks of our portfolio and merits recognition for its mid-teens free cash flow margin. Rigorous application and continuous improvement of the Vontir business system is advancing our profitable growth initiatives and enhancing our competitive advantages. We improved our return on R&D investment, more than doubling the gross margin contribution from new products. We gained share in core markets, drove continued Matco franchisee growth, and improved profitability by over 200 basis points at both Teletrac, Navman, and Hennessy. We successfully accelerated our portfolio diversification strategy and deployed $965 million with the successful acquisition of DRB. DRB's excellent performance will be highlighted later. We also established a $500 million retail solutions portfolio, which is accretive to our enterprise growth, margin, and software-enabled profile. As highlighted in the November keychain, this portfolio enjoys a long runway of attractive adjacencies for future M&A, compelling secular growth drivers. Adding to our key achievements this year, our ESG program continues to progress rapidly thanks to our recent commitments and accomplishments. In December, we made a commitment to reduce absolute Scope 1 and Scope 2 greenhouse gas emissions by 45% by 2030 from a 2020 base year, and a net zero goal by 2050 in support of the Paris Climate Agreement. We held our first Energy Kaizen at VitaRoute in Altoona, Pennsylvania, harnessing VBS to reduce emissions, drive cost savings, and develop and engage our employees. On the employee safety front, we held our first ever Vontier Safety Week and published our goals to achieve OSHA top quartile results in all of our businesses. We're also active throughout our communities. In addition to donations through the Von Teer Foundation, the Von Teer Scholarship Program awarded 10 new scholarships and six scholarship renewals in 2021 to the children of hardworking employees. Von Teer also recently received a number of inclusion and diversity accolades. These include achieving a perfect score on the Human Rights Campaign Corporate Equality Index and earning our status as a 2022 military-friendly employer. Our ESG efforts are critical to our corporate strategy and to the vitality of our organization, and I could not be more proud of our progress here. Now I'd like to spend a couple moments highlighting last week's energy transition investment announcement. We're committed to tackling decarbonization in transformative ways with our commitment to invest more than $500 million over the next five years. Vontyr is at the forefront of solving next-gen mobility and transportation challenges, and this investment advances our industry-leading efforts to address the global low-carbon energy transition. Part of this strategic pledge is the acquisition of drives. a leading provider of EV charging and energy management software. The acquisition accelerates our portfolio diversification and e-mobility strategies. It also positions us well to capitalize on global EV charging long-term secular growth drivers. Drives provides us with market-leading technologies within the highest growth, most profitable network management software market segment. While the transaction will be initially dilutive, We believe it provides a prudent opportunity to participate in an early stage growth technology company. Business models in this sector are still developing and continue to evolve with significant capital yet to be invested across the value chain. To that end, given our focus on the software segment, we chose not to exercise our option to buy Tritium, but we remain supportive and expect them to realize their value proposition of which we are beneficiaries. Given our 16% ownership position, this provides upside value to our stock and the potential to add further dry powder for capital deployment. These important outcomes demonstrate that we are realizing our vision of Vontyr as an industrial technology company focused on smart, sustainable solutions, and that we remain committed to building a better, stronger, more focused growth portfolio. The volunteer value creation flywheel is taking effect and we are well positioned to continue to post strong results in 2022 and beyond. With that said, we're initiating our full year 2022 adjusted diluted net EPS guidance range of $3.05 to $3.15, which includes our core revenue growth expectation of low to mid single digits, adjusted core operating margin expansion of 30 to 60 basis points, and free cash flow conversion of approximately 100 percent. Also included in our full-year outlook is the accretive impact from the acquisition of DRB, which will contribute high teen cents to EPS. Furthermore, driven by DRB's technology leadership and new site activity, we believe DRB will contribute more than 300 basis points to the top line or high single digit total growth at the enterprise level. Our core growth outlook includes a more favorable view of the 2022 EMV headwind of 25 to $50 million. Subsequently, we believe that 2023 will be the EMV sunset trough with a year over year headwind of 300 to $350 million. We are confident in our ability to more than offset these headwinds and expect earnings and cash flow growth through this period. Lastly, as part of our continued focus on creating shareholder value, we expect that we will be in a position to opportunistically purchase our stock early this year under our previously announced share repurchase program. We are also initiating our first quarter adjusted diluted net EPS guidance of 64 cents to 67 cents. In spite of the challenging comparison that resulted in a 14.3% core growth in the year-ago period, we expect first quarter 2022 total growth of mid-single digits or a flat to low single-digit decline on a core basis and flat adjusted core operating margin. Our first quarter outlook reflects continued supply chain impacts to backlog and sales conversion But we are encouraged that the supply-demand imbalance improves in the second half of the year. With that, I'll turn it over to Dave to provide for the fourth quarter results and financial detail. Dave?

Thanks, Mark. Adjusted net earnings for the fourth quarter were $141 million, a decrease of 4% from $147 million in the prior year period. This translated to adjusted net earnings per share of $0.83. The decrease in earnings was driven by lower sales conversion as a result of the ongoing supply chain constraints and component shortages. Our strong price actions and better than expected bottom line results from our acquisition of DRB partially offset the EMV and ongoing inflation headwinds during the quarter. Reported growth declined 3% and core revenue declined approximately 8% in the fourth quarter due to the expected decline of EMV as well as a tough comparison to the strong recovery that we experienced in Q4 of 2020, which included not only a high point in quarterly shipments of EMV, but also benefited from the Mexico regulatory driver and overall high single-digit growth in our non-EMV revenues. On an ex-EMV basis, reported revenue grew high single digits and core revenue was about flat despite the otherwise difficult comparison. Adjusted operating profit for the fourth quarter was $194 million, a decrease of 3% compared to the prior year, primarily driven by the lower revenue volumes, which was partially offset by 140 basis points of adjusted gross margin expansion, largely resulting from the accretive addition of DRB. Adjusted core operating margin for the quarter decreased 70 basis points, reflecting the impact of the core revenue decline. Adjusted operating margin was in line with the prior year at 24.6%. We continued to effectively offset the impact of raw material inflation with price actions, which was about net net margin in the quarter. We did see some margin headwind from mixed due to the size of the EMV decline, and this was offset by the positive impact of DRB on our operating margin. In the fourth quarter, we generated adjusted free cash flow of $148 million, a conversion of 105%, reflecting a slight decrease in working capital during the quarter. Working capital dollars at the end of Q4 were 6.1% of the last 12-month sales, an increase from 5.6% low point in Q1, but still very low historically. Our full-year adjusted free cash flow conversion was 96%, which included the additional tax payment in Q2. Shifting to liquidity, we ended the quarter with a cash balance of $573 million and had no borrowings under our $750 million credit facility. Our net leverage stands at 2.8 times adjusted EBITDA at the end of 2021. As Mark noted, we anticipate the deployment of some capital towards share repurchase as market conditions warrant, and we will continue to assess this opportunity. Looking at the performance of our two platforms, mobility technology's core revenue declined 11%, which reflects a low double-digit decline in core revenue at GVR. Growth in environmental and services was more than offset by the decline in EMV, as well as lower sales conversion in both developed and high-growth markets, given the impact from supply chain constraints and COVID. After including the revenue contribution from DRB, the mobility technology's total revenue declined 4.5%. Q4 was our first full quarter with DRB in the portfolio, and we could not be more happy with the momentum and performance they have exhibited. DRB delivered high teen sales growth, primarily driven by double-digit growth in point-of-sale control systems. Core revenue growth in our diagnostics and repair technologies platform was 2%, driven by low single-digit growth at Matco, reflecting the continued strong demand environment against the recovery compare from the prior year, partially offset by a supply and labor-constrained environment across the platform. Diagnostics and repair bookings grew at a mid-single-digit rate, demonstrating the continued demand backdrop and also the challenges of sales conversion. Matco demonstrated a strong year of net new franchisee additions, which will be additive to the expected solid growth from same-store sales in 2022. Looking at total company sales regionally, the EMV and other compared dynamics read through quite clearly. In developed markets, core revenue declined mid-single digits as a result of the EMV impact in North America. In our high-growth markets, we declined about 20%, compared to the mid-teens growth in the prior year Q4, reflecting not only the challenging comparison, but also supply chain and COVID impacts to sales conversion. High growth markets will of course remain lumpy, but we remain confident in areas such as India, Middle East and Africa, and Latin America as long-term opportunities for outsized growth given future regulatory drivers, investment in fueling infrastructure, and our physical presence in these strategically important markets. We remain committed to our profit improvement actions that will better position the company in 2022 and beyond. During the fourth quarter, we recognized restructuring charges of approximately 4 million, slightly lower than we previously planned as the timing of certain actions have now shifted into 2022. We now anticipate we will recognize 2022 charges of about 15 million, which is a continuation of post-spin actions to drive simplification globally and to align resources with our highest priority future growth opportunities. We continue to expect we will achieve our original savings objectives for 2022 from 2021. Turning to the outlook assumptions for the full year 2022, we expect core revenue growth of low to mid-single digits, which includes an expected EMV headwind $25 to $50 million. Our price actions have largely been priced into our backlog, and so we expect to be price-cost positive in 2022. Our core operating margin expansion target is 30 to 60 basis points, reflecting continued execution on our profitable growth initiatives and cost management, partially offset by persistent inflationary pressures, supply chain and logistics constraints, and mix. That said, we are establishing our full-year outlook for adjusted earnings per share at a range of $3.05 to $3.15, reflecting continued momentum and execution in our core business, as well as an expected high teen cents contribution from the full-year impact of the DRB acquisition, partially offset by some dilution from drives in the high single-digit cents per share range. We anticipate our full-year effective tax rate to be around 23% as we capture the benefits from our ongoing tax planning initiatives. We enjoy a CapEx light business model with capital expenditures in 2021 of 48 million, or about 1.6% of sales, and we expect CapEx of about 1.5% of sales in 2022. As for free cash flow conversion, after seeing working capital increase in the second and third quarters of 2021, working capital decreased to very low levels again in the fourth quarter. While we anticipate some normalization of working capital levels in 2022, we expect free cash flow conversion for the full year of 2022 to be approximately 100%. Moving on to the first quarter of 2022, we expect core revenue will be a decline of low single digits to flat, as mid-single digit core growth in our non-EMV businesses only partially offsets the ongoing sales conversion headwinds and reflects the difficult Mexico compare and the continued tough comp on EMV, which was strong in 21 ahead of the adoption deadline. Adjusted core operating margin is expected to be flat, reflecting our continued execution in a supply-constrained environment. As Mark stated, this translates into a change per share of 64 cents to 67 cents in the quarter. With that, I'll turn it back to Mark.

Thanks, Dave. To wrap up, as I said a year ago at this time, 2021 would be an important springboard to a multi-year transformation with a long runway of opportunities. I'm incredibly proud of our team's execution this past year and the progress made towards our strategic and financial priorities, but there still remains much to do. While we expect supply chain and COVID-related headwinds to extend into early 2022, we're encouraged by the underlying demand for our solutions, order growth, and backlog trends. In fact, at the MAC Coast Sales Expo, which was held just last week, results exceeded our expectations as orders per franchise came in at record levels with double-digit growth versus pre-pandemic levels. And so we enter 2022 from a position of strength. We have strong, steady demand, pricing power, and a track record of successfully navigating unprecedented headwinds. And we're leaning into what's ahead. We're positioning the portfolio for accelerated profitable growth and making incremental investments targeting high return growth opportunities. I'm confident in our ability to continue to successfully execute organically and inorganically to deliver accelerated earnings and cash flow growth through the EMV sunset and beyond. We remain committed to unlocking shareholder value for the long term. We will continue to compete for your investment through prudent and disciplined capital deployment, as well as continuing to deliver strong financial performance. One last item before we move to Q&A. I'm pleased to announce that Our 2022 Investor Day will be held in September in New York. We look forward to sharing a more in-depth view of our portfolio strategy and key growth initiatives, in addition to providing long-term targets, highlighting the power of the volunteer value creation flywheel and compounding growth algorithm. With that, I'd like to turn the call over to Lisa. Lisa?

Thanks, Mark. That concludes our formal comments. Brittany, we are now ready for questions.

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and 1 if you would like to ask a question. And we will take our first question from Steve Tessa with JP Morgan. Your line is now open.

Hey, guys. Good morning. Good morning, Steve. Can you just clarify a little bit around the – sorry to kick it off with an EMV question, but can you just clarify kind of the revenue trajectory here? I mean, you said $3 to $3.50 of headwind in 2023, and then that will be kind of, I guess, the trough of that revenue base. What was that revenue base in 2021? Just as a starting point, maybe if you could just kind of like really clarify those statements.

Yeah, sure, Steve. Yeah, so obviously we still have significant revenues in EMV, even though it's declining. So we were in the, you know, low 600 millions, I would estimate, for 2021. I think when you look at 21 and 22 combined, we had talked about kind of previously 21 being 75 to 100 and 22 being a similar decline here. I think what we saw be the high end of our decline range in 21, and part of that is, you know, due to supply and component problems, we probably shipped a little more EMV backlog into 2022, maybe, you know, 20, 25 million or so. I think we're still in the range of what we were thinking. When we think of the then 23 decline, I think what we're trying to articulate is our current view of the shape of the tail. So, the peak to trough is, you know, in the range of what we've always thought here, Steve, but I think what we see is a little more robust activity falling off and adoption happening a little faster. There's a whole bunch of variables that go with this, obviously, as you guys know, you know, what people will buy, any share shifts that happen, you know, the ultimate rate of adoption amongst thousands of customers, so it's tough to predict. But, you know, we've been pretty consistent here updating you folks with what we know when we know it, and we exit the year, which is always a good time for updating our assumptions here with this view to how the shape of the tail will play out.

So when you say trough of the – do you mean trough of the year-over-year revenue headwind, or do you mean like that actually that revenue base is now at kind of a floor level and then just kind of like is stable from there?

Yeah, that's right, Steve. So we've always thought that, you know, we had this compressed cycle as a result of EMV, and what happens is we return to more of a normalized run rate. Now, one of the, you know, things that will impact that at the end of the day is kind of getting back to this normalized refresh rate in the U.S. dispenser market, but ultimately what we're talking about is the year-to-year decline to get back to a baseline business for U.S. dispensers and payment systems.

Yeah, you know, what's new here, Steve, because we've always said it's $400 to $500 million, what's new is that we're defining the size and the shape of the tail. We're not changing the overall guidance we've given prior on the magnitude. It's just that's the largest year-over-year decline is going to be 2023, and then we move on from there because it's done.

Okay, so... it's $600 million is what you said is this kind of revenue base, and then that will go down 25 to 50, then it will go down 3 to 350, and then we move it to 24, 25, and we'll basically stay at that level going forward. Is that what you're saying?

Then we get back to more of a normalized market condition. I think we're a little over 600, so more like probably 640. Then we get back to a normalized run rate. in the U.S. market, and then we wouldn't experience, we don't think, any material shift from EMV going forward, and we get back to growth in that market. I think, you know, talking about the decline, it's also what Mark noted, that we have significant actions to offset here. We continue to have, you know, our ex-EMV or non-EMV portions of our business have historically been and we believe will continue to be steady growers in that mid-single-digit range, and As we do deals like DRB, we tend to mix up that growth rate. So I think that fundamentally gets us to offsetting a significant amount of that year-over-year headwind in 23, and it gets you to that low single-digit decline range or maybe close to flat. From there, it would take just a modest amount between now and then to see your way to flat or even growth. And that's why Mark noted we would anticipate you know, earnings and pre-cash flow expansion to the extent we were able to completely offset the envy headwind in that year. That's how we're thinking about it today.

Yeah, okay. And so, sorry, one last quick one. What was the year-over-year revenue in that, you know, 640 for 21? What was that in 20? So it was a year-over-year headwind this year? Yeah. In 21, we came down roughly 100 million. Okay. And so, you know, and then 2020 was the peak year. Great. Thanks. Sorry for all the details. It's just obviously with the way your stock is behaving, it's the elephant in the room that kind of just is helpful to clarify. So sorry for all the focus, but just want to get these revenue numbers right.

No, Steve, I'm glad you're asking the question so we can make sure we're really clear on it. And I think what's happening in today's call is not only the size and the shape of it, But it's also our confidence to offset that because we have conviction around our roadmap there. So that's also news.

Okay, great. Thank you. Thank you.

We will take our next question from Andy Kapowitz with Citigroup. Your line is now open.

Good morning, everyone. Good morning. Good morning, Andy. Mark, just focusing on 22 for a second. When you hosted your retail fueling day in November, I think you talked about expecting flattish organic growth for 22. And now you're talking about loaded mid single digits. So what's the difference here? What's the drivers. I know EMV headwinds a little bit less than 22. And have you seen any improvement yet in logistics related issues or Omicron disruption that gives you more confidence in that second half ramp?

Yeah. So first of all, I think we've got a lot of confidence in, in exiting the year and entering 2022 on what we call the profitable growth initiatives. So very significant traction we made there. So just give me a minute so I can just talk about that, give a little color around it. First of all, we doubled our operating profit target based on simplification efforts, strategic pricing, better drop through on new product development, as well as focus on high growth markets. And keep in mind, we have underperforming assets in our portfolio like Hennessy and Telestrack Navman that improved 200 basis points of OMX last year. So we're carrying a lot of momentum from our initiatives into 2022. Of course, there is some backlog. We left some revenue on the table in the end of fourth quarter, and so we've got certainly the benefit of that. But I'll tell you, you know, it is getting better on the supply chain elements, but it's still something that, as you've heard a lot about in earnings calls, that folks continue to work through. It's mostly around electronic components and semiconductors, printed circuit boards. We are seeing some improvement in that, but clearly I think by the second half of this year we're going to see a better improvement. Dave, do you want to add any color there? No, that's great.

Okay. Thanks for that, guys. And then maybe just, Mark, if you could talk about your decision to invest the $500 million in energy transition over five years. Now that you bought out Drives, could you talk about Drives' growth and margin profile, and what kind of a foothold does the company give you in the EV infrastructure-focused software? How quickly is it growing? I know you said it's dilutive, but you give us more color in the margin profile and where Vontir goes from here in EV infrastructure.

Yeah, happy to talk about that. We're really excited because, you know, this – announcement of these investments is, you know, we're placing meaningful dollars to diversify our portfolio away from ICE, and I think it's providing a compelling opportunity. So let me talk about what you just brought up here about drives. First of all, it's a sub-$10 million sale today. It's expected to grow high double digits over the next five years. And I think when you look at what drives provides, it is really – a very compelling opportunity because it's an intelligent cloud-based software subscription that is supporting the EV charging infrastructure. And the question that you ask is, what are the margins? This is a very high-margin segment of the business. It's very attractive because they provide this operating system. It's software. It provides operations management, energy optimization, billing and roaming capabilities. and driver self-service apps. And so think of this as a white label software business. They're a leader in this space with 20% market share. It's not profitable on the bottom line because we're investing for growth, but on a gross margin, this is a very attractive place to play and it positions us in the highest segment of the market. Dave, do you want to add any color?

Yeah, Andy, you can imagine this is an early-stage technology business, right? So we're not managing it like we say would a normal business that we might acquire in our normal kind of operating company structure. It's not profitable, and frankly, that's okay. That's where it should be. What we're focused on is capturing the market and investing for growth. So I think more to come. over the coming years, but it should have a good software margin profile as it scales, growing significantly at that early stage, high double-digit type rates. So we're really excited about the opportunity here for what this, as kind of an anchor asset here around the EV charging infrastructure space.

Appreciate it, Gus.

And we'll take our next question from Andrew Obin with Bank of America. Your line is now open.

Morning, Andrew. Can you hear us?

Can you hear me now? Sorry about that.

Yeah, we can.

Yeah, apologies. I still haven't figured out how to do the mute function. Yeah, so the question on pricing, can you just give more details as to what pricing was specifically in the fourth quarter and what are your expectations for 22? Or if you don't want to go there, what's the annualized benefit you'd get in 22 for pricing actions year-to-date?

Yeah, so in the fourth quarter, you know, we continued to see good price. You know, we roundtrip a little bit of the early price that we took coming into 21, but we continued to see good price in the, you know, probably close to 3% range. As we were, as I noted in my remarks, price-cost favorable in the fourth quarter. We did continue to see kind of the gap close, but we were accretive on the dollars and the margin standpoint from a price-cost perspective. As we look to 22, you know, we carry in good price. We'll continue to price for inflation. And we anticipate that contributing to the year. We've talked about kind of the full year, low to mid single. You know, if you think about it from an XEMV perspective, probably maybe more like mid to high single growth perspective and, you know, revenue contributing, you know, a decent amount of that growth. And being price cost positive again, being price cost positive again in 2022.

And just a philosophical question, sort of managing this downturn in EMV for the next two years, you know, if you look at sort of industries with decent structure, you know, if you look at electrical, what Eaton is doing in the channel, if you look at the scope of price increases that HVAC industry is able to achieve, You know, given a favorable industry structure in North America, you know, how do you think about, you know, potentially pushing the pricing, you know, further in the EMV space? You know, I doubt that your competitors would object. So, you know, how do you balance volume versus price in EMV as volumes continue to go down? Why not accelerate it? Why not push pricing harder and just accelerate the decline and be over with it? Just how do you think about it? Thank you.

Well, Andrew, the way that we think about price is we first of all started last year with strategic pricing. I think it turned into structural pricing. And it is a really great underlying benefit that we started early last year that we're always going to price for this market and this opportunity. I think we've been, in my view, a leader on the pricing front, and I think we're we're going to take advantage of that going forward, particularly as EMV rolls off. And, you know, we are a market leader in the space. And so I think there's a lot of good things that have been happening on price, and we anticipate we're going to press that opportunity to the fullest.

Thank you. Appreciate the insights.

Thanks, Andrew.

We'll take our next question from David Rasso with Evercore. Your line is now open.

Hi. Good morning. Thank you for the time. I was just curious that conversations are being had at the board level as well as top management level regarding capital redeployment. Just given the way the stock's been acting really since the spin, and you've made some fairly attractive acquisitions from DRB to drives, your commitment to where you're going to invest. I mean, the streets view of your earnings in 22 have gone up 24% since you spun, and the stock's down 10%. So just looking at your evaluation, nine times EBITDA, roughly nine times the new EPS guide, how are we balancing? Clearly, a story of the street is not at least appreciating when you look at how some of your peers trade. I mean, some of the parts would suggest stocks should be significantly above where it's trading. So I'm just curious. I understand the portfolio transition needs, but what is the conversation right now about share repo and the significance of it? versus some of these M&A opportunities that you're contemplating?

Hi, David. Thanks for the question. I guess what I would share is that, you know, we've talked about M&A being a priority for us historically because of the portfolio transformation that we're undergoing, which will take a significant period of time, but also that we're focused on returning shareholder value and that share repo and M&A are not mutually exclusive. We agree with you there's been kind of a dislocation of value, and especially in recent months here, we've seen stock trade at what feels to us like a significant discount to the intrinsic value of the stock. And that's why you heard us come out on this call and say we would opportunistically be looking to buy, depending on market conditions, our own stock back. So again, not mutually exclusive. I think you've heard a little bit of a change in our direction here when it comes to the capital allocation. So we'll see what market conditions bear here. But I think we're aligned with the sentiment. Mark, did you add anything?

Yeah, I think an important thing to say, as also said in my remarks, is that we compete for investment and we're focused on shareholder value. And we don't see this as an or, but certainly an and opportunity at the current stock prices for excellent returns.

I appreciate that, just the term opportunistic. I mean, where the stock has been for a while now, and especially now, the opportunity seems readily available. So I'm just making sure we understand there's some understanding at the board level of the frustration with some shareholders since the spin. Because you're executing well. The M&A seems very logical and clearly value-creating, but there's some mismatch with how the street's perceiving the portfolio. So I appreciate the comments. And if we can just one more time clarify, the 23 EMV decline, the 3 to 350 is a one-year decline. That's not cumulative from the 21 level. Correct. That would be the decline 22 to 23, one year. But your comment that you can offset it where you expect earnings to grow, the idea is you can offset roughly half of the revenue decline, but from cost outs, mix, I assume some M&A, some repo, you would still expect EPS to grow in 23, just so I heard. Yeah. Yeah, terrific.

Which is based on an assumption that we offset more than half of the revenue decline, as you noted. So I would see us offsetting, you know, more than half, a significant amount of the revenue decline, which would get the annual kind of all-up decline down to, say, a low single digit, maybe a little bit better decline. to be flat and fully offset, if we saw some modest M&A between now and then, we think that would put us into that flat or better territory. And really, if we were in that zone, given the activities we've already commenced upon, we would anticipate expanding earnings and free cash flow. Thank you very much. I appreciate the time.

Thank you for your feedback, David.

And we will take our next question from Brian Lau with Wolf Research. Your line is now open.

Hey, good morning, everybody. I just wanted to touch on Tritium briefly. Could you remind us the status of the commercial agreement there and when that lockup is over?

Yeah, absolutely. You know, I said in my prepared remarks we had 16% of outstanding shares. The lockup ends in July. And I just, you know, comment about Tritium. You know, we're very supportive of Tritium as they fulfill their value proposition. But keep in mind, whether we choose to remain a long-term shareholder at some level or monetize all or a portion of our stake, we believe there is value upside to volunteer from the possible gains as well as additional dry powder. So we're really happy with our position here.

Great. And then regarding Teletrack NavMan, can you just talk a little bit about what drove the 200 bps of margin expansion and kind of what you're baking into the guide? for 2022. And then also on the guide, is there any of that repo baked into the 305 to 315 number, just given the share count of about 171 million on your slides? Thanks.

Yeah, let me take the second part first and then turn to Mark for some of those details on the improvement. You know, it's tough to know because we're going to be looking at market conditions here, but I think at a baseline, I would minimum we're offsetting the impact of dilution as a result of stock comp, which is kind of, you know, called a penny and a half, two cents.

Yeah, let me take the Teletrack NavMan question. Look, as you know, it's a turnaround story, and we've been making really solid progress on it. We essentially applied VBS, and we really reframed the opportunity on some more of the profitable growth segments and let as we understood the business model more, also with new management in the business, then we could really reframe it in a way to position it more for profitable growth. I think the other thing that has really paid off for us is that we talked about churn in North America, and churn has been a tough thing for us to wrestle, but we've made really solid progress on that. Of course, that helps pretty significantly. I think more importantly with this turnaround story that in Q4 and for the full fiscal year of 2021, we posted positive low single digit ARR growth or annual recurring revenue growth. And that's a really solid step in the right direction. We haven't had positive ARR growth in that business in a long time. So clearly with the reposition with the new platform, TM360, the reducing churn, that this is a step in the right direction. I think it really sets us up for accelerating into this fiscal year. So I think the issue when you look at organic revenue growth, it takes a bit for ARR to drop through to the P&L because of the SAS model and the length of the contract, but clearly making really solid traction in the business.

And we will take our next question from Julian Mitchell with Barclays. Your line is now open.

Thanks a lot. Good morning. So just, you know, maybe one last time on EMV. So your sort of revenue in year in 2023 from EMV you're saying is about $300 million. Is that fair? And that compares with the sort of $740 million number back in 2020. I just wanted to make sure I understood that. And what you're then saying is off that 300-ish base, you're then flat or slightly down thereafter. And also wanted to double check of that in-year 300 to 350 million drop, should we assume a sort of 50% or so decremental margin still?

Yeah, Julian, I think you've directionally got it all correct. You know, we return to that base, you know, we'll see where we end up, 275, 300-ish. By the time we get through the decline, hit the trough, we wouldn't expect large moves up and down then as a result of EMV. And, you know, this is kind of above fleet average margin. I think 50% for a kind of decremental is a reasonable thought. Obviously, we're looking to realign those resources. and do other things, and some of the revenue that comes on to offset some of this growth comes on at actually rates around there or better also. So those are things we're focused on as we work through the offsets that Mark talked about.

That's helpful, thank you. And then I just wanted to clarify on the free cash flow guidance, because Dave, you've mentioned sort of some of the working capital moving parts for this year, so maybe put a finer point on how you see working capital playing out. And just wanted to double check, is that 100% conversion guide relative to the adjusted net income, you know, sort of for the 310 or so of EPS, or relative to the gap net income of sort of 270-ish per share?

It's adjusted free cash flow conversion against adjusted net income. And to your point on working capital, Julian, Look, we've run it, you know, we're really at unprecedented levels. You know, we entered last year at levels we hadn't seen, and then we entered this year at even improved levels from that. I personally, given some of the activities that we have endeavored upon that I think will help us hold on to some of the benefits we've seen through the pandemic, as well as some of the structural improvements from doing acquisitions like DRB, which has a really nice free cash flow profile, I would anticipate that we would not return to pre-pandemic levels of working capital in the business. Having said that, there will be headwind to the levels we're operating at today as inventory and safety stock back into the system where maybe today we're dissatisfied with the level it's at. But even with that, we anticipate being able to achieve that 100% conversion ratio.

Perfect. Thank you.

Thank you, Julian.

And we'll take our next question from Jeff Sprague with Vertical Research. Your line is now open.

Thank you. Good morning, everyone. Jeff Sprague here. Just coming back to drives, if we could, just kind of interested in the level of investment this might take. You know, this obviously is going to be a very competitive space. And to the earlier point, I think maybe where Dave Brasso was, right, buying an expensive software business when you trade at this sort of multiple and taking losses on investment is just, you know, there's a lot of friction in the P&L as you do that. So when we think about this kind of earnings headwind that we're dealing with in 2022 on drives, Do you think that moderates from here? Or does this business require kind of a substantial level of additional investment to get it to scale and make it competitively viable?

Good question, Jeff. I'll just make a couple quick points. So we see this maybe at the OP level kind of starting out here being dilutive in the teens, millions of dollars. And Yeah, it's dilutive to our business model for sure, but we do believe there's a real opportunity here for value creation in this early stage asset. We were very fortunate to be in the position and have the option that we entered into really two years prior. And given the development they've had over the last couple of years, we felt pretty fortunate. So yes, it's a headwind, but we really do believe it's a real opportunity for overall value creation for the broader bond tier here. It'll take some investment. But we're really focused on the growth side of that investment, and we think the longer-term value creation opportunity here is very good. I would make one more point that we have talked historically about a range of types and sizes of deals, and where most of the M&A we look to prosecute in our funnels and our day-to-day work is much more aligned with something like a DRB. We've said that these types of deals, earlier stage, more strategic, higher growth opportunity, could be out there, and this is surely one of those. Mark, you want to add anything? Yeah.

I think when you look at how we've made decisions on capital deployment, that it's very disciplined. It's very much strategy-led. This is something that we've been very close to in terms of this market. So, I mean, you see us, we did not buy into Tritium. We actively made that decision based on our strategy. with our capital, but we are stepping forward in this space because of what we think is our ability not only to add value but to win in this space, and it will position us great for the mid and long term. But going back to the capital allocation kind of coming up in the near term, because that's a long-term play, and we announced $500 million of both inorganic as well as organic investment over five years. But I think when you think of capital allocation maybe more in the near term, it's really middle of the fairway deals like DRB that you should think of.

Great. And maybe just totally switching gears to a different topic. Just looking at the, you know, auto aftermarket with what's going on with the shortage of new vehicles and what it's done to use car prices and the like. I just wonder if you see any kind of discernible change in behavior and the auto aftermarket, pricing power on tools, you know, kind of big picture. If you could put a little bit of a bow on that question for us, it'd be helpful.

You know, just one thought, you know, clearly we're seeing a really healthy end market continue in Matco. And, you know, a lot of that is tied to the health of the And, and customer, which is the, uh, you know, professional auto mechanic. So that remains a very healthy environment. We see that read through and, you know, credit profiles and demand levels. Um, so it remains a very strong environment. Um, I, I think we just had a recent Mac co expo mark. You, you want to talk a little bit about.

Yeah, really strong demand there. We, we continue to see, uh, things like diagnostic scan tools where we launched a Maximus, uh, 4.0 last year, making great progress. because of, you know, I think that backdrop being such a strong market, as well as toolboxes. So there's a pretty wide range of things that are being sold into the aftermarket. And we anticipate this will continue. There's legs to it. It'll continue for some time.

Great. Thank you.

Thank you.

And once again, that is star and one if you would like to ask a question. And we'll take our next question from Andrew. This is Kalia, sorry, with Berenberg.

Hey, good morning, guys. Good morning, Andrew. So, you know, one last EMV question. Please don't shoot me. But obviously it seems like a little bit of new news, and I'm wondering why, I guess, why is that 2023 – item kind of new, like, I guess, why is it, is it something new to you that, um, you weren't expecting? Um, I guess, I guess all the confusion is just like, I guess the street was not set up for kind of modeling that in and we're all going to have to model that in now. And it seems like a little bit bigger hole to fill than we were initially anticipating. So I'm just wondering what changed on your end that you didn't have that visibility before.

Well, it's always been, I would say it's really been about the shape of the tail. So we knew 2020 was going to be a peak, and we would return at some level to more historical levels of, you know, performance in our U.S. dispenser market. But it was kind of at what pace we got there, a lot of, you know, We really have always understood what the larger customers were going to do, but there's over half of this market that's made up of, you know, 5,000, 6,000, 7,000 smaller customers that we service through distribution. So it was really getting through, you know, the adoption deadline, seeing how demand behaved, and for us to get a little better view as to how the shape of the tail would play out. I think what we see happening now is adoption – by folks not extending as long, being pulled in and ostensibly completed here by the end of 2023. So I think the new news is dimensionalizing the shape of the tail. And over the last couple of years, I think we've tried to share what the view was as contemporaneous as we've had it. And there's so many assumptions that go into this. We've tried to be as transparent as we could when we had conviction around something. And I think, you know, you're doing that again.

Let me just jump in here, too. I think the other thing that is new is clearly the lens that we're bringing that, okay, fine, we know the shape of it. The magnitude didn't change, but we know the shape, so we're articulating that. But we're also articulating the confidence around this. I mean, look at the underlying growth rate for X EMV bookings at mid to high single digits. And it is, you know, averaging higher with the acquisition of businesses like DRB and the progress we're making on the profitable growth initiatives and the momentum that we have. So, you know, we've thought long and hard about how do we figure out this tail and also the offsets to it. And I think you see the evidence of those offsets at work, particularly with that underlying XEMV bookings growth driver issue. And so, you know, that's the confidence that we're also bringing in today's call.

Okay. Okay. And maybe just one last one in a different area. The telematics business seems to be progressing well. We've got some new information with Samsara that's gone public, and there's obviously a couple of bigger players in the space, Verizon. Just kind of what is your – How do you expect to compete with kind of these powerhouses and telematics? Or what makes you guys feel like you're different and continue to hold your own with a lot of the, you know, the impressive type of competition that's out there?

Look, it's a great market. It's a high-growth market. It's very fragmented. There's lots of different ways to play that market. You know, truth be told, we had to get our feet under ourselves and recover, you know, from the technology debt. I think we're positioned well for that. Well, we have a strong global presence. We're number one in Australia and New Zealand, very strong presence in the UK. And the offerings that we have now are very contemporary and very reliable. But there's niche ways of playing this market because it is so big, so frothy, and so fragmented. So I don't think you go and play head-to-head with some of the bigger players in the market, but there's lots of niche areas around that for us to further develop deploy our capabilities and strategy around. So keep in mind, this is a $180 million business, 95% SaaS, so there's a little bit of breadth to it, and really great positions to move in this market. So excellent market.

Yeah. Okay, thanks.

Thanks, Andrew.

And we will take our next question from Rob Mason with Barrett. Your line is now open.

Yes, good morning, guys. Where did backlog end the year?

Yeah, backlog, you know, reasonably well on an apples-to-apples basis, about 25% year-over-year.

What does your 22 guide, the low single, the mid-single-digit core growth, what does that assume in terms of backlog reduction within that?

Yeah, I can't give you the exact percentage here, but, you know, clearly we anticipate some backlog reduction and that continuing as EMV kind of comes off. But You know, as we think XEMV, we talked about, you know, look, we talked about the year being low to mid-single digit core growth. And as we think XEMV for 2022, you know, that's more of a mid to maybe high for the year. And I would say we would anticipate some similar performance on the order side. So I think the punchline, as I would frame it, is that the solid mid-single-digit plus demand environment is what we expect from the order side continuing once you kind of sort through the EMV and other compare noise here.

Okay. Okay. That's helpful, Dave. And then last question. Just you mentioned you're still on track with your repositioning, restructuring effort. Just remind us again, you know, what the savings expectation was for 22 and any thoughts on the cadence. of that, how that phases in?

Yeah, so look, we spent just a little under $15 million this year, sorry, in 2021. We had anticipated spending a little more than that. We're seeing some actions push into 2022. That's really us timing things and phasing things with things like EMV, where we're taking some corresponding actions, and we'll have a better than one times payback on that spend that we had in 2021, so I think closer to $20 million of savings. And that's the exit rate we'd exit the year at and the benefits we'll get in 2022. Then we talked about some additional spend. And really, these things relate to this multi-year positioning around the simplification, profitable growth initiatives, and repositioning some resources to take advantage of EMV and then reposition to other areas of growth as we make kind of this large multi-year

I see. Thank you. I'll pass it back. Thanks.

You bet. And we will take a follow-up question from Steve Tessa with J.P. Morgan. Your line is now open.

Hey, sorry, guys. Just one last quick one here. On the acquisition, you'd said a 3% contribution. What's that kind of annual run rate now for DRB? That's a little bit lower than than I think what we had in our model. What's kind of that business? What do you expect for annual revenues for that business in 2022?

Yeah, so, you know, this was $170-ish million business last year. It maybe came in a little better. We saw really good growth in the fourth, growing, you know, kind of double-digit mid-teens here in 2022.

Okay, so $170, and it'll grow mid-teens in 2022. Got it. Okay, thanks a lot. Appreciate it. Steve, thanks.

We have reached our allotted time for questions. I will now turn the program back over to Mark Morale for any additional or closing remarks.

Thanks, Brittany. Look, I'd like to take a moment just to thank the volunteer team for their ability to focus and execute and deliver a really strong year in the face of significant headwinds. We also made really important steps on our portfolio diversification, and the progress and momentum positions us very well into 2022 and beyond to accelerate profitable growth. So thanks for joining on today's call. Have a good day.