Vontier Corporation Common Stock

My name is Gretchen and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Volunteer Corporation fourth quarter and full year 2022 earnings result 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'd like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star two. I would now like to turn the call over to Ryan Edelman, Vice President of Investor Relations. Mr. Edelman, you may begin your conference.

Thank you, Gretchen. Good morning, everyone, and thank you for joining us on the call this morning to discuss our fourth quarter results. With me today are Mark Morelli, our President and Chief Executive Officer, and Anshu Managa, our Senior Vice President and Chief Financial Officer. During today's call, we'll present certain non-gap financial measures. Information relating to these non-GAAP financial measures is available on the investor section of our website at bondtier.com. Please note that unless otherwise noted, the presented financial measures reflect the year-over-year increases or decreases. We will also 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 they are made, and we do not assume the obligation to update any forward-looking statements. With that, I'd like to turn the call over to Mark.

Thanks, Ryan. Good morning, everyone, and thanks for joining us on the call today. Let's get started with a few highlights of the quarter and the year on slide four. We're very encouraged by our strong finish to the year, reporting 10% core top-line growth for the fourth quarter, 11% excluding the impact of EMV. Our teams around the globe remain disciplined in their execution of our profitable growth initiatives and platform strategies, which continue to deliver results. As we noted on the last quarter's call, we are sunsetting EMV. This upgrade cycle has impacted our U.S. fuel dispenser business over the last five-plus years, and we are transitioning to a new normal in 2023. We are confident in our outlook for our growth in this business going forward, as well as in our strategic vision to accelerate profitable growth across the portfolio. Orders in the quarter were up 10%. Excluding the impact of EMV from the year-over-year comparison, orders in Q4 were up in the high teens. We continue to see good momentum as the demand environment remains constructive across most of our end markets and backlogs remain above pre-pandemic levels. Global supply chain conditions are normalizing, shortening lead times, and helping to reduce our past due backlogs. The momentum we've seen in core top line growth underscores our team's commitments to our customers, along with the execution of our profitable growth initiatives and platform strategies. We're building a portfolio of industry leading technologies and solutions and higher growth verticals of the mobility ecosystem. Let me highlight a couple of notable examples of our profitable growth initiatives. Our fueling aftermarket business grew top line more than 20% in 2022. We have built an incredible installed base of dispensers globally, and this is a solid example of profitable growth initiatives we are executing with VBS. We'll monetize this growth opportunity for years to come. Our environmental products business delivered high single-digit growth, driven by increased market demand for our innovative solutions that solve one of the most pressing needs of our fueling customers, environmental compliance. Technologies like vapor recovery and leak detection are benefiting directly from increasing global regulation. Our platform strategies are also making significant progress. Let me highlight a couple examples. BRB, which ended the year with pro forma core top line growth of over 30%, was largely driven by strong market demand for tunnel car wash and continued share gain. We deployed VBS across this business, which helped drive a 400 basis point improvement in operating margins under our first year of ownership. We see a clear path for sustainable growth in this platform over the next several years as we begin to leverage existing customer relationships to capitalize on upgrade and expansion opportunities. The integration of Invenco is off to a great start, and we're beginning to see early benefits of the investment thesis from the combined portfolio in our dispensers and payment business. During the quarter, we successfully launched the new INFX microservices software platform, which enables a more modular, scalable, and customizable solution for our convenience retail customers. Our fuel or C-store early adopters are already seeing the benefits of this technology. Alternative Energy grew more than 30% last year as our fleet and municipal customers continue to shift more fuel usage towards compressed natural gas and renewable natural gas or biofuels to support cost-effective decarbonization efforts. We are optimistic about the future of this business, particularly as we launch our new hydrogen dispensing technologies and can better serve a multi-fuel future. Lastly, DRIVE continues to scale commercially, owing to its best-in-class, hardware-agnostic EV charging software. DRIVE now manages over 35,000 charge points, and we continue to gain traction with key customers. We now serve over 60 premier customers like EVgo, Shell, Mer, Volvo, and Circle K, to name a few, in more than 30 countries and across a variety of verticals. Drive's scalability and track record of successful integrations has enabled leading market positions in places like the Nordics, which has among the highest penetration of EVs anywhere in the world, and where Drive now manages 75% of the public fast-charging networks. These examples demonstrate that we are making meaningful progress on our strategy-led portfolio transformation designed to enhance profitable growth through delivering smart, sustainable solutions with a tighter focus on the mobility ecosystem. We're bolstering our competitive advantages in markets with strong secular drivers by adding to our connected hardware and software capabilities, and in turn, creating offerings that leverage data analytics to solve increasingly high-value customer problems. Our strategy revolves around connecting smart hardware, scaling through digitally enabled platforms, and managing assets to deliver outcomes like improved operational efficiency, enhanced user experiences, or frictionless payment transactions. All of these lead to more growth and higher recurring revenues with more accretive margins. Throughout 2022, we exercised a disciplined capital allocation approach. As you may remember, early last year, we committed to prioritizing share repurchase. And for the full year, we completed over $325 million of share repurchase. Share repurchase remains a key component of our capital deployment strategy. And as Inshuman will share with you, we also plan to pay down debt in the coming quarters. We also invested organically in new product developments and technologies, along with nearly $300 million in strategic acquisitions that will drive sustainable long-term growth and value creation. Notably, we published our first ESG report in November. I am proud of the ambitious goals we've set for ourselves and the progress we have already made across a number of dimensions, including greenhouse gas emissions, diversity, and safety. In 2022, we reduced our total recordable injury rate by 30%, increased our percentage of global female leaders from 22% to 26%, and increased our percentage of Black and Latinx employees from 10% to 15%. It's imperative that we attract and retain world-class talent and that we cultivate an inclusive and innovative culture. Our ESG program is helping us do just that. More recently, we received a B from CDP following our first climate disclosure. This puts us in roughly the top 30% of all submitting companies right out of the gates, recognizing our programmatic rigor and commitment to transparency. Sustainability is core to our business and strategy. We are uniquely advantaged to drive sustainability impacts that matter to our customers and key stakeholders. including helping our customers meet their own ESG commitments. Before I turn the call over to Ann Schuman, I wanted to provide a few key thoughts on our progress and outlook. I couldn't be more pleased with the way our colleagues around the globe responded to adversity and stayed focused delivering for our customers and stakeholders this past year. It's a true testament to the fundamentals of the volunteer business system or VBS that underpins our culture of innovation and continuous improvement. Looking into 2023, while the macroeconomic backdrop remains dynamic, historically, our businesses have proven to be resilient and we are seeing signs of healthy customer demand. We remain agile and we will continue to closely track order trends and monitor leading indicators for each of our businesses. Regardless of the economic outcome, we are ready and we will continue to leverage our culture of excellence powered by VBS to deliver strong operating results and enhance core growth. When coupled with disciplined capital deployment, we have an attractive framework for value creation. I'd like to turn the call over to Ann Schuman to provide the financial results.

Thanks, Mark, and hello, everyone. Let's start with a brief summary of our performance in the fourth quarter on slide five. Sales of $872 million were up just over 10% on a core basis and 11% excluding the impact of EMV. This performance is the result of disciplined execution, improving supply chain conditions, particularly when compared to the prior two quarters, and strong momentum on our profitable growth initiatives and platform strategies. Growth was broad-based, including another quarter of strong growth at DRB and continued strength across the GBR portfolio. Adjusted operating profit for the fourth quarter was $190 million, down slightly with the prior year, with a corresponding decline in operating profit margin, impacted by anticipated product mix dynamics, continued growth investments, and a full quarter of Invenco revenue. These impacts also had a drag on adjusted gross margin during the quarter. Looking ahead, we anticipate Invenco will add 7 to 10 cents of EPS in 2023, with synergies ramping as the year progresses. For the full year 2022, we delivered solid underlying profit improvement, up low double digits, excluding the year-over-year impact of EMV. We effectively navigated difficult inflation and supply chain conditions and ended the year with positive price cost. Our performance reflects the power of the one-tier business system, including the deeper deployment of a focus and prioritization process across the organization. Adjusted earnings per share for the quarter were 81 cents compared to 83 cents in the prior year period. Higher interest expense was mostly offset by a positive contribution from lower share count year over year. Turning to the top-line performance of our two platforms in slide six. Core revenues for mobility technologies increased approximately 13% with robust growth across much of the portfolio due to solid execution, improved supply chain conditions, delivery on backlogs, and increased bookings. BRB had another quarter of strong growth, driven primarily by continued strength and share gains in the tunnel car wash segment. Our fueling, aftermarket, and alternative fuels businesses each posted 30% top-line growth with environmental up high teens. Retail solutions was up mid-single digits in the quarter. As expected, the teletrack nav mine business posted its first quarter of core growth, up low single digits with strong momentum as we exited the year, as ACP ended 2022 up low double digits. Core revenue in our diagnostic and repair technologies was up 3%, with a 4% increase in Matco. Matco experienced higher backlog conversion, enabled by an improving supply chain environment, leading to same-store sales growth of mid-single digits. Byproduct category? we saw a strong demand for power tools, up 30%, and tool storage up low double digits. Solid growth in same-store sales was partially offset by normalization in net franchisees after exceptional growth in 2021. Moving on to pre-cash flow and the balance sheet in slide 7. Fourth quarter adjusted pre-cash flow was $175 million, up 15% year-over-year, with conversion of 157 percent. For the full year, adjusted free cash flow was $314 million, with adjusted free cash flow conversion of 63 percent. Capital expenditures were $17 million in the quarter and $60 million for the year, or an increase of 14 percent for Q4 as we continue to invest in growth, productivity, and sustainability. This was short of a full-year target range due primarily to higher than anticipated working capital in Q4 given strong sales growth, including a higher AR balance. For the full year, working capital as a percentage of sales returned to pre-pandemic levels. Net leverage ended the year at 3.2 times down sequentially, but still above our target of around three times. Our longer-term target range for net leverage remains 2.5 to 3 times, and we expect to be within that range in 2023. We repurchased approximately $40 million in shares in the fourth quarter, which brought us to just over $325 million for the full year, or nearly 14 million shares. Following the end of the quarter, through the month of January, we repurchased an incremental $18 million. Turning to our guidance for 2023 on slide eight. We are initiating a Q1 2023 guide of adjusted EPS of 57 cents to 62 cents, which assumes a core revenue decline in the low to mid single digits and adjusted operating profit margins down in the range of 100 to 140 basis points. Withstanding the impacts of EMV, we anticipate baseline core sales will increase low single digits, and adjusted margin to expand 130 to 170 basis points. At the midpoint, as a percentage of full year, this represents a relatively normal start to the year at around 22.5%. The guidance for the full year 2023 is slightly above the framework we provided on our Q3 call in November. I want to point out that this guidance, as previously communicated, assumes a $300 million revenue headwind from the year-over-year decline in EMV, which translates to about $150 million in operating profit pressure or around 250 basis points of margin. Adjusted EPS is expected to be in the range of $2.73 to $2.83 which is based on a mid-single digit decline in core revenue and margin compression of 60 to 80 basis points. Again, if we strip out the impacts of EMV, for the full year we anticipate baseline sales to increase mid-single digits on a core basis and adjusted margin expansion of 180 to 200 basis points. Relative to the previous framework, our outlook assumes restructuring savings at the high end of the previously communicated band of 40 to 45 million. We expect free cash flow conversion in the range of 90 to 100% returning to normalized levels. Although we began to see improvements in working capital in Q4, our inventory returns remain below normal. We are proactively working on reducing our safety stock. and resetting our min-max level at a part number level, allowing us to carry less inventory and still meet anticipated demand. Longer term, continued progress on our product line simplification will enable us to further rationalize SKUs and create additional runway for inventory turns to improve. We have provided you with some other P&L assumptions relative to our guide on the right-hand side of the slide. I won't walk through each of those, but I would call your attention to our assumption for an outstanding share count of approximately 156 million shares, which reflects the share repurchase completed in Q4 and in January, but does not assume the additional share repurchase that we would complete in the remainder of the year. We have a returns-driven, disciplined, and balanced capital allocation program aimed at creating long-term value. We remain focused on investing for long-term growth, and we still view share repurchase as a key priority. We also remain committed to maintaining a healthy balance sheet and our investment-grade credit rating. To that end, we anticipate paying down between $150 million and $200 million in gross debt this year. With that, I will turn the call back over to Mark.

Thanks, Ann Schumann. We're extremely proud of the progress we've made since our spin. In 2020, we became a public company and built our foundation. In 2021 and 2022, as part of Vontir 2.0, we assembled an incredible leadership team, began our portfolio transformation focusing on non-EMV growth, and executed on self-help initiatives that continue today. Now, on tier 3.0, our smart, sustainable solution strategy builds on this foundation and moves up the technology stack, solving high-value customer problems, driving profitable growth, transforming the portfolio, and generating top-tier shareholder returns. The 3.0 strategy has three pillars. Pillar one, optimize the core, expands margins through profitable growth initiatives like strategic pricing and product line simplification. We are still in the early innings here with tremendous runway ahead to optimize margins and drive growth. Our progress and continued focus on optimize the core puts us in an athletic stance heading into an uncertain macro environment. Pillar two, expand the core, leverages our core platform positions to expand and grow. Prime examples of this includes our alternative energy and fueling aftermarket businesses growing over 20% in 2022. Pillar three, adjacent markets, expands into near adjacencies where we have a right to play and win. Examples include expansion opportunities at DRB and our new hydrogen dispensing technologies. Bonteer has unparalleled portfolio breadth across the mobility ecosystem. We believe we are the only company capable of providing a full suite of connected hardware and software solutions to connect, manage, and scale assets across this $30 billion-plus addressable market. We have a diverse and growing set of customers across the car wash, convenience retail, auto repair, fleet operators, and EV charging verticals. These customers are facing common secular trends and common challenges that they trust us to solve. Labor and skill shortages, increasing car park complexity, increasing regulation, increasing focus on decarbonization and sustainability, and consumer demands for more personal, frictionless experiences are all forcing the evolution of the mobility ecosystem. We operate at the center of this ecosystem and are poised to enable the way the world moves for years to come. We are uniquely positioned to benefit from the energy transition, regardless of the pace of this transition, as we have winning positions across the multifuel landscape. Our team is energized by the opportunity to be a leader in the global energy transition and to help ensure it is safe, affordable, secure, and sustainable. We are galvanized around the Vontir 3.0 smart, sustainable solution strategy and our corporate purpose of mobilizing the future to create a better world. We are excited about the road ahead. as we take advantage of the resiliency and strategic optionality inherent in our businesses to build a better, stronger, and growthier portfolio. I look forward to sharing more about our progress and this strategy to accelerate growth at our Investor Day next month. With that, Gretchen, we're ready to open lines for questions.

At this time, we'll open the floor for questions. If you'd like to ask a question, please press the star key followed by the one key on your touchtone phone. If at any time you'd like to remove yourself from the question queue, press star two. Our first question comes from Andy Kapolitz from Citigroup.

Hey, everyone. Hey, good morning. So you mentioned that orders were up 10% and high teens, I think, ex-EMV and improved sequentially. Why does that translate into, for instance, only low single-digit core revenue growth in Q1 with the 10% you did in Q4 and then just focusing on orders? Has your non-EMV-related order strength continued into the first quarter? Have you seen any hints of a slowdown from your customers?

Thanks, Andy. We did see good strength in our orders in the fourth quarter. Underlying businesses are strong. When we look at it from a book-to-bill perspective, our book-to-bill XEMV for the full year 2023 was 1.03, so a little above 1. We see good growth in our businesses based on our discussions with our customers, the convenience store operators, the larger national chains, the larger regional players. continue with new site builds. When we look to the other pieces of our portfolio, like Matco, we see the mid-single-digit growth visibility out there. DRB should continue to grow high single digits despite a very strong compare from the previous year. So, when you put it all together, we feel comfortable with mid-single-digit growth for next year.

Yeah. Andy, this, Mark, I'll just jump in on that, too. I think the The outlook for Q1 is impacted by timing. We know the construction cycles have been impacted a little bit by weather, too. So while we're pretty confident on the outlook, there also is an impact of Q1 due to timing.

Appreciate the call, guys. And then maybe just a little more color regarding your margin performance in Q4. Why was mix worse than you thought, and what about the other items that pressured margin? Could you talk about the additional growth investments you're making? I know you didn't change your 23 operating framework from what you gave us, but how do you think about any incremental margin pressure impacting 23 results?

Sure. From a prior year perspective, our guide did include the Invenco revenue of just over $20 million, but no operating profit in the fourth quarter. And it included the incremental investments for drives. However, for the fourth quarter, we did have about an 80 bps miss to what our operating profit margin guide was. And that was really tied to the amounts and timing of some year-end expenses. and then just a very slight impact from incremental mix. From a perspective of next year, we feel pretty comfortable with our margins. We have margin expansion outside of the EMV impact, so the baseline margins are improving. That's supported by a significant restructuring program that we are executing and also driven by the mix of higher margin growth businesses like DRB and aftermarket businesses.

And Shivan, were those expenses like labor related or, you know, something else, supply chain related, any more color there?

No, a little bit labor related in the sense that, for example, one of the bigger ones was the timing of healthcare claims came in a little hotter in December than we had been running all year. But those are controlled because you have stop losses, et cetera. But it did impact us, for example, 3 million for more than what we were expecting.

Appreciate the color.

The next question comes from Nigel Cole from Wolf Research.

Good morning, everyone. So just on the EMV headwind, the $3 million, obviously no change there, but I think the math is you know, $25 to $50 million of year-over-year headwinds in the first quarter based on the guidance points. So just wondering if we could maybe just get out of these kind of comp issues and maybe just talk about the dollar number. So if we take the $2.50 expectation for the full year, would you expect the dollar sales to be relatively stable quarter to quarter, or would you expect it to deteriorate through the year? Just any color there would be helpful.

The 250 baseline sales for dispensers in the U.S. are relatively linear over the four quarters. There is some seasonality, but you're talking plus minus 5 million based on the timing of some of the construction of our customers' projects. But typically they range plus or minus 5, 7 million in a quarter.

Okay, good. And then... Just thinking about the 1Q guide, the down 100 to 150, I think in the past you've talked about core margin, not absolute margin. So I'm just wondering, is that 100 to 150, is that all in EBITDA margins down year to year, or is there a core and M&A impact we should think about as well?

These are all in operating profit margins. We did not guide to core operating profit margins. I think we're trying to simplify some of our reporting and make it easier for our analyst community, both buy side and sell side, to model us. So we did not include the core operating margins as we did in the past, just the reported operating margins.

Okay. Definitely makes it a little bit easier. And then just my final question is on components. Obviously, very strong growth in 2022. Aftermarket businesses don't tend to grow that much. I'm just wondering how much of this is maybe supply chain related perhaps. And when this all shakes out, what proportion of your sales in GPL will be components?

Yeah, Nigel, this is Mark. Look, I think this has been an initiative we've really tackled as part of our profitable growth initiatives. I think all of our revenue, generally speaking, has been helped by the easing of supply chains. So we're definitely getting an uplift there. But this is a very specific, very concerted effort. I think we pushed really hard at the game share with the EMB upswing cycle, that we did that really well. And I think we're also prosecuting a very good layup for 2023 based on U.S. dispensers. You know, the large regional players are definitely making investments with new build-out and construction, as well as as well as underground and environmental. But all this leads to a better capability to capture aftermarket, and I think it was just an area that was, I would say, a relative opportunity that we saw more than a year ago, and we started really focusing on that with our profitable growth. And, yeah, there's no question supply chain has helped, but it's got a lot of legs to it in the future.

That's great. Thanks, Lucas.

Our next question comes from Jeff Sprague from Vertico Research Partners.

Thank you. Good morning, everyone. Hey, just on EMV, it's obviously nice to see that number not moving anymore. I just wonder, though, if you could elaborate a little bit on your actual visibility on the 250 in 2023. And then, obviously, this is a U.S. discussion. I wonder if you could give us a little bit of color on what you're seeing in non-U.S. fueling markets.

Yeah, Jeff, you know, we're very happy that we have sunset the EMV cycle. It's played through. Obviously, 2023 will be a trough year on a year on year compares. But, you know, we're also very confident in the number that we're putting out there. We've done some recent conversations with customers that indicate there is large national players as well as regional players in the United States that are continuing to build out their footprint, and they're also doing rebuilds on existing sites. So there's a healthy investment that's going into convenience retailing right now. And there's no question that, you know, that we have good visibility there on that 250. So I think that's a very good number. And we're feeling better and better about that. So I think it's a number that we've kind of put out there. And as we get more into the year, we're feeling better. very comfortable about that number. And then, you know, there's regulatory drivers that are also helping us. In the U.S., there's a tank upgrade cycle that's going on for below ground, and so we're kind of early innings on that tank upgrade cycle, and that's been driving our environmental business. It's been one of our profitable growth initiatives to get better on that. And then your question was on the international side, and we definitely see a good growth opportunity on international and predominantly regulatory drivers here. Latin America is a good one. Brazil is going into a security of payment cycle. We have tax fraud issues in India. We've got vapor recovery. in Mexico and Brazil and Middle East is also represents a good growth opportunity for us as they're getting more environmental on their regulation. So we love these regulations. They are certainly popping up not only in the U.S., but around the world. And these are things that drive good secular growth for us.

Great. Thanks for that. And just an update on the process on the Hennessy and GTT, what's going on there, and any update on timing, expected timing?

Yeah, so the GTT process is moving along well, so we're working through that as we speak. On Hennessy, we took a two-piece-parts approach to that process. We had a piece of the business that wasn't profitable. We shut that down previous quarter, and we're in the process of selling those assets. The remaining of Hennessy, which is a profitable business, we expect to launch that process later this year when the timing is right.

Great. Thank you.

Our next question comes from Julian Mitchell from Barclays.

Hi, good morning. Maybe just wondered if you could flesh out that baseline revenue guide of mid-single-digit growth in 2023 a bit more, maybe kind of firm-wide, how much is volume versus price, and then Just organic sales-wise, you know, any color on bits and pieces like teletrack, DRT, DRB expectations, if there's any major difference versus the plus mid-single.

Yeah, let me just start off with a bit more of a strategic overview, Julian, and then I'll let – and Schumann walk you through some more of the nuts and bolts. Look, the profitable growth initiatives, no question, have legs. We talked about, you know, good traction in businesses like DRB, and we fully expect DRB to be a really good performer into 2023 and beyond. You know, what's driving that business is certainly the site build-out on car wash. It's very resilient also. in downturns and folks are continuing to see good returns on their build-outs, even with elevated costs and elevated interest expenses. And so we do believe there's very good visibility. Obviously, a really strong year last year won't be as strong this year, but still there's no question there's legs to that. So I think when you look at how we build up the revenue, some of the strategic pieces, including alternative energy, which we also continue to have good legs, Invenco is going to be a good contributor to us this year as well. So I think these initiatives are really have momentum. I think they're, they're paying off for us and translating into decent visibility into the year for growth. Do you want to give some of the details on that?

Yes. From to your question on pricing, we do expect price to be a tailwind probably in the low single digits. But keep in mind, pricing is dynamic. We, are very disciplined in making sure price cost remains positive. We were early to the game with increasing pricing as part of our strategic pricing initiative, which is one of the profitable growth initiatives. Some of the areas that will grow above the mid-single digits, Mark talked about our aftermarket business being extremely strong, And us having a focus around that, our C&G business, Angie, that's expected to grow above the fleet average. DRB will continue to grow above the fleet average despite a very hard comp coming into 2023. That business should grow high single digits. So definitely pockets of strength across the business, and we feel very good about our portfolio.

That's helpful. Thank you. And then just maybe on the margin and earnings cadence through the year, should we think about sort of operating margins year on year? They're down again Q2 and then sort of flattish in the second half year on year. And on EPS, is the first half worth maybe a high 40s share of the full year EPS? Is that the right way to think about it?

Yeah, as we've moved past COVID and now the EMV upgrade cycle has sunset, we're moving into a more normal seasonality. I would think of about 42% to 44% of the year coming in the first half from an operating profit and an EPS perspective, with operating profit margins expanding in the back half of the year, given the timing of revenue, some of the timing of restructuring savings, and then the ramp-up of inventive synergies. That's helpful. Thank you.

Our next question comes from David Rasso from Evercore ISI.

Hi. Good morning. My question is on the free cash flow. After the 63 percent conversion in 22, the improvement to 95 percent next year, I'm just curious the bridge in that improvement. And then secondarily, if you can achieve that, you've got about 200 million extra of cash flow after the dividends and debt reduction target? How should we think about your prioritization of utilizing that extra $200 million? Thank you.

Thanks for the question. In 2022, we dealt with a very difficult supply chain environment, and our inventory policy was focused on meeting customer demand and satisfying our customer and winning mindshare with our customer. As the supply chain conditions have improved, we have instituted concrete measures to lower our inventory and improve our inventory returns. For example, we've reduced our safety stock. We've reduced the min-max level at a part number level. The product line simplification helps significantly reduce the number of SKUs we carry. So all of these, it takes time to work through over the next few months and reduce our inventory levels, which gives us a lot of comfort in the fact that inventory turns will improve. From a ESO perspective, in 2022, by Q4, we've gone to the pre-pandemic levels, which is probably a better reflection because during COVID, when money was free, a lot of people were taking the early pay discounts. So I think we feel very comfortable off the 90% to 100% free cash flow conversion target that we've put out there. Talking about capital deployment, yes, you're right. We've basically, in our guide, committed to about $200 million of the little over $400 million in pre-cash flow that we would generate. We have a very focused returns-driven capital allocation policy and focus on driving shareholder value. Given where we are from a stock price perspective, it's hard for M&A to compete with on a return basis with stock buyback. So I would expect for you to see more share repurchase as we go through the year.

David Ridley Lane That's good to hear. Thank you.

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

Andrew Oben Good morning. This is David Ridley Lane on for Andrew. I'm just wondering, what are the in-year benefits from restructuring that are embedded in the 2023 guidance? And also, what are your expected energy transition investments in the year?

Yeah, so the in-year benefit is the high end of the 40 to 45 million range that I talked about in the prepared remarks. We feel pretty comfortable that we're going to deliver in-year benefits of 45 million. at the high end of what I previously said last quarter. The impacts of the energy transition, I would view them in the low $20 million range, so somewhere between $22 million and $25 million.

And then on Invenco, the $0.07 to $0.10 accretion was better than we expected. Are you seeing more opportunities on the cost synergy side? Are you seeing stronger demand? Just sort of an update on what you're seeing.

Yeah, I think the cost synergies are cracking the plan, and we feel pretty comfortable about it. From the upside perspective, this adds tremendous value to our portfolio. It's a very strategic acquisition that we did. And both from a payment side with our current portfolio, but from the new platform that we just launched this quarter, we feel very excited about where this business is positioned and how it integrates into our overall portfolio.

Yeah, I'll just jump in there real quick. It not only adds to our retail presence from a more strategic standpoint, opportunity with some of the large national players. It also fills some of our payment gaps, excuse me, product gaps on the payment system side. So you've got a sort of two-fold benefit there. Obviously, you know, as we get into owning this for a little bit, we have, you know, more confidence in what we're able to articulate, you know, around our hypothesis when we initially acquired it, but we're incrementally feeling better.

Perfect. Thank you very much.

Our next question comes from Joe Ritchie from Goldman Sachs.

Thanks. Good morning, everyone. Good morning. Good morning, Jeff. And human in your in your prepared comments, you mentioned having more confidence in the kind of preliminary framework that you provided last quarter for 2023. And just looking at that framework, you know, the high end, you know, you can you can assume is around $3. And so maybe just talk through a little bit about what's driving that confidence. And, you know, are you now talking about a potential framework that could be above $3 for the year?

I'll stick to our guide for the year that we already provided from a framework perspective. But let me talk about why we're feeling more confident. When you look at the different pieces, one, EMV has sunset. The numbers are as we expected. We've moved past EMV. Second, the base business, the $250 million, as Mark elaborated, we feel very comfortable about it. It's not just internal analysis. It's speaking to our customers. looking at our customers' plans, and we feel really strongly about it. Our ex-EMV growth, we have a lot of drivers. Our orders in Q4 prove that the markets remain healthy, and so we feel comfortable about that piece of the framework. Our restructuring is at the high end. Now, what I will say is different from the framework we provided. In that framework, we basically assumed that all our free cash flow would be redeployed in either debt paydown or share buybacks. As our policy is to provide a guide with the current share count based on share purchases we already did, that's what we've provided. But as we pointed out, there's another couple hundred million of free cash flow that we expect to generate this year that we can redeploy, which would ultimately lead to higher EPS. So That's why in my prepared remarks I said we're slightly above the framework we provided last quarter. Hopefully that was helpful.

Yeah, super. And I guess just my one follow-on there, and I know we've talked about this, the EMV sunsetting quite a bit already today and fully recognize that you're confident in the 250 number. But, you know, if you take a look at the fourth quarter, there really was only a one-point difference between your core growth and ex-EMV growth. which is like roughly $8 million. And so, I mean, it does feel like the $300 million 10-point number that you have for 2023, I mean, it does really appear conservative at this point. And so it just maybe helped elaborate on like the conversations with customers and why that number should really uptick a lot, you know, as you progress through 2023.

Yes, a couple of points out there. First, the Q4 number did benefit from the fact that supply chain conditions eased significantly. Lead times came down and we could ship more. The second part of the phenomena was when you really look at the or U.S. dispenser market, excluding the EMV upgrade. That remained very healthy. We saw good order activity for above-the-ground equipment coming in from our large national and regional customers as they continue to spend money on new site builds and refreshes. We have spoken to our large customers. We've looked at their site plan build-outs. Keep in mind the construction of new sites, which is roughly – 75%, 80% of this $250 million number. That cycle that starts with acquisition of land, getting the permits, and then working through the construction. So as we talk to our customers, we get visibility into the plans, and that makes us comfortable with the $250 million number for the year.

Let me add in maybe one thing we haven't said before, as I feel like we're trying to get this message through. One area... that also gives us confidence is when you look at the large and regional players in the U S we absolutely have majority share here already. So this is the part of the market that is experiencing growth. And it's not like we're having a game share here. It's, it's, we already own a very, very large percentage of that market already. And, and so I think it's kind of already in our wheelhouse.

Perfect. Thanks guys.

Our last question comes from Steve Tulsa from JPMorgan.

Hi, this is Danielle Anon for Steve Tulsa. In terms of pricing for next year, how much of the low single-digit growth is carryover price, or are there any new price increases expected next year?

There's a blend of both, and we do have price increases for next year built in. But keeping my – the environment is dynamic. As we stay focused on being price-cost positive, if there is incremental inflation, we are going to pass that to the market.

Okay. And then what was the spread on price-cost in the quarter?

In Q4, we benefited just under mid-single digits from a price perspective.

Okay.

And we were price-cost positive.

Thank you. And it appears we have no further questions at this time. I will now turn the program back over to Mark for any closing or additional remarks.

Yeah, thank you, Gretchen. Look, before we close, I just want to say a couple comments here. I really want to take this opportunity to thank the teams across Frontier whose performance and dedication really allow us to continue to perform and gain momentum in our business. I'm very confident in our business model and our ability to remain agile and execute by leveraging our culture of excellence led by VBS. I think we're making excellent progress, and our execution on our multi-year growth strategy is intact, and we're positioned to unlock value for our shareholders for quarters to come. Thank you for joining us on today's call. I look forward to engaging with many of you over the next several weeks, as well as in our investor day in person in New York. Thank you very much, and have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.