Vontier Corporation Common Stock

My name is Travis, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Volunteer Corporation's first quarter 2023 earnings 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 star, then the number one on your telephone keypad. If you would like to withdraw your question, press star two. I would now like to turn the conference over to Ryan Edelman, Vice President of Investor Relations. Mr. Edelman, you may begin your conference.

Thank you. Good morning, everyone, and thank you for joining us on the call this morning to discuss our first quarter results. With me today are Mark Correlli, our President and Chief Executive Officer, and Anshuman Abra, our Senior Vice President and Chief Financial Officer. You can find both our press release as well as our slide presentation that we will refer to during today's call on the Investor Relations section of our website at volunteer.com. Please note that during today's call, we will present certain non-GAAP financial measures. We'll 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 risks and uncertainties. Actual results might differ materially from any forward-looking statements that we make today, and we do not assume any obligation to update them. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available on our website and in our SEC filings. Before I hand the call over to Mark, I want to take a moment to remind everyone that starting this quarter, we are reporting and discussing our results in line with our updated segmentation. Additional information regarding our segmentation is included in the appendix of today's presentation. With that, I'd like to turn the call over to Mark. Thanks, Ryan. Good morning, everyone, and thanks for joining us on today's call. Let me kick things off with some high-level commentary beginning on slide five. We're off to a strong start in 2023, having delivered Q1 results that are above the guidance we provided and raising our outlook for the full year. We delivered another quarter of strong top-line performance in Q1, with all three segments exceeding expectations. Core revenue grew 4%. Baseline core revenue, which excludes the year-over-year impact from the EMV sunset, grew 11%. Both of these were above the guidance we provided, and Schumann will provide more details later in the call, but at a high level, upside was driven by better-than-expected demand in our U.S. dispenser business, as well as continued strength in our environmental and aftermarket and our fueling segment. In mobility technologies, DRB continues to outperform, along with another solid quarter at ANGI, our CNG, and hydrogen business. And we're seeing nice growth at Matco, both on same-store sales as well as net franchisee ads. This strong performance reflects the execution of our connected mobility strategy, which incorporates our ongoing growth initiatives as well as incremental improvements in supply chain conditions, which allowed us to convert higher levels of backlog. Our end markets remain constructive, supported by strong secular drivers, demonstrating the resiliency of our portfolio. Our book-to-bill ended the quarter at one, despite strong sales growth this quarter. This included nearly $20 million in incremental sales from higher backlog conversion. Our reported operating profit declined versus prior year as expected due to the sunset of EMV, and I'm encouraged by the underlying performance of our businesses. Baseline operating margin expansion of 80 basis points demonstrates solid execution, the benefits of our strategic initiatives, and the power of VBS to deliver operational excellence. We're in the early innings of a longer-term opportunity to optimize our cost structure, which gives us confidence in the ability to achieve our multi-year margin expansion opportunity. The cost actions we began implementing last quarter continue to gain traction in Q1 and will continue to ramp through the remainder of the year. We continue to make progress on our multi-year portfolio transformation as well. In mid-April, we announced the sale of GTT for $107 million, or about 10 times 2022 EBITDA. We will redeploy these proceeds to further strengthen our balance sheet and return capital to shareholders through additional share buybacks. These actions are already underway, as Enshuman will highlight in a moment. Turning to our outlook for the remainder of the year, strong first quarter results, solid end market demand, and conviction in our strategic initiatives provide increased confidence in our outlook, and we are raising our adjusted EPS guidance for the full year. While we remain vigilant in the current macro environment, demand across our end markets is supported by the secular drivers we highlighted during our recent investor day. This is reinforced by our recent channel checks and customer conversations. We remain optimistic given our strong fundamentals, the momentum with our strategy, and our resiliency in our portfolio. We continue to make great progress on our connected mobility strategy as we shared with you at our recent investor day. Our strategy is centered around driving operational excellence, accelerating core growth, and transforming our portfolio through greater leverage in adjacent markets. We refer to these as our three pillars, optimizing the core, expand core, and adjacent markets. In addition to delivering annual margin improvement, pillar one, optimize the core, increases our focus on simplifying our business and expands margins. And pillar two, expand the core, accelerates profitable growth by focusing on select opportunities, which we've referred to in the past as our profitable growth initiatives. We're also redeploying investments in new product development and sales capabilities in support of expanding organic top-line growth. Longer term, these two strategic pillars enhance our ability to leverage adjacent markets, pillar three, through both organic and and inorganic means to further accelerate growth and transformation. Let's turn to slide six for a quick look at a few strategic developments in the quarter. Two weeks ago, we held our annual CEO Kaizen event, building eight teams with the intent of accelerating our connected mobility strategy. These events are a critical part of the VBS culture and bring together dozens of cross-functional and business leaders to collaborate on the company's actionable opportunities. Just as an example of some of the actions we focused on this year pertinent to the Optimize the Core pillar, we accelerated our product line simplification and SKU rationalization programs. We are reducing our number of dispenser platforms from 20 to 15 this year, having already come down from 32. We're also implementing dynamic Kanban across the VitaRoot factories, identifying a path to reduce several million dollars worth of inventory over the remainder of the year. Under Expand the Core, the Matco team worked through accelerating initiatives to drive higher franchisee ads by materially improving the conversion rate and reducing time to conversion. The Retail Solutions team implemented process improvements to streamline the setup time for the NFX software platform by 75% per site. This frees up more capacity internally to scale more effectively to meet our large and growing backlog. As many of you will remember, we acquired Invenco last September to augment our payment solution through both vertical integration and building a stronger offering in microservices. Importantly, we formally launched the NFX microservices software platform late last year. NSX is revolutionizing the way our convenience retail customers operate, enabling them to consolidate major four-core systems into a set of lightweight microservices. It also provides customers with an easily configurable cloud-based solution with standard-based APIs that enable faster deployment on-site. Significantly improved transaction speeds and differentiated customer offerings address a key secular trend within convenience stores, the need for enhanced end-user experiences to drive engagement, traffic, and loyalty. Convenience retail is an attractive growth vertical for us, and we have leading positions. Non-fuel retail sales have grown at a 5% CAGR over nearly 20 years. And retailers have seen a 20% plus increase in foot traffic with investments in newer, larger formats, enhanced amenities, expanded offerings and food service, and professionalist experiences. All of this is enabled by automation and digitalization, which are our two core competencies. And these trends are sustainable even through the energy transition. Industry data shows that C-Store retailers with an onsite EV charging capability are seeing a 50% increase in foot traffic into the store to make a purchase. There is real value to be generated for the convenience retailer, and we are competitively advantaged to solve their high value problems. As an example, We are excited to announce a substantial win for the NFX software platform, where we are deploying the platform across all of the U.S. sites for a major C-Store operator. We also have an attractive pipeline of opportunities going forward to continue rolling out NFX. At Teletrak Davman, we've launched nine new feature sets or programs in the first quarter across multiple industries and geographies. This includes Canadian ELD solutions for the transportation industry, asset tracking and management tools for the construction industry, and an expanded EV vehicle library across all industries. We have notable momentum around Teletrac's new electric vehicle readiness tool that integrates seamlessly with the TN360 platform. The AI power tools shows fleet operators the feasibility of switching to EVs calculates the total cost of ownership, calculates the total CO2 and fuel savings, and facilitates easy carbon reporting. The tool also recommends the ideal electric vehicles to switch to and advises on the number, type, and ideal location for chargers. In sum, We have solved one of our fleet customers' biggest pain points by significantly reducing the complexity in the energy transition planning process. And we now have a comprehensive end-to-end solution for managing sustainable fleets. Lastly, while not listed on this page, we are equally excited to have received SBTI validation of our near-term greenhouse gas emission targets. We are targeting a reduction in Absolute Scope 1 and Scope 2 emissions by 45% and a reduction of Absolute Scope 3 emissions by 25%, both by 2030. As our Chief Legal and Sustainability Officer Kay Rowan shared with you at our Investor Day, our strategy is inextricably bound to sustainability. It's about providing smarter, more sustainable solutions to our mobility ecosystem customers helping them achieve their own sustainability goals and doing our part to ensure a healthy planet. Now, I'd like to turn the call over to Ann Schuman to provide the financial results.

Ann Schuman Thanks, Mark, and good morning, everyone. As Ryan mentioned at the start, beginning this quarter, we are reporting results for our three operating segments, mobility technologies, prepared solutions, and environmental and fueling solutions. Please turn to slide seven. Reported revenue of $776 million increased 4% on a core basis or an 11% baseline increase, excluding the impact of the EMV sunset. All of our operating segments saw the benefits of healthy end market demand and improving supply chain conditions, driving the solid year-over-year performance. Adjusted operating profit of $161 million declined slightly versus the prior year, and the adjusted operating profit margin of 20.8% declined approximately 100 basis points, at the better end of a previous guidance range. Baseline margin improved 80 basis points, led by our productivity initiatives and continued cost-price performance. Adjusted earnings per share of 68 cents was above our guidance range and relatively flat with the prior year despite an 11-cent headwind from EMV. A year-over-year benefit from share repurchase was offset by higher interest and FX. Adjusted free cash flow in the quarter was 78 million, representing 73 percent conversion ahead of a normal seasonality and well above prior levels, resulting from solid working capital management. Turning to the segment performance, starting with mobility technologies on slide eight. Sales increased over 18%, including a full quarter contribution from the Invenco acquisition. Core growth of 12% was broad-based. Demand for our market-leading car wash technologies remains robust. with DRB growing over 20% as we continue to expand share in an attractive market for tunnel car wash. Sales at Angie, our alternative energy solutions business, were up over 30%. Angie continues to benefit from the increased adoption of lower-emission alternative fueling solutions like compressed and renewable natural gas, as well as hydrogen systems for large and medium-duty commercial vehicles. The turnaround of Teletrak Navman continues to gain speed, with annual recurring revenue up high single digits and core sales up low single digits in the quarter. Segment operating profit of $48 million increased 17% versus the prior year, translating to an operating margin of 19.5%, which is down 30 basis points versus the prior year. Invenco profitability is still in the early stages of scaling up, creating a year-over-year mixed headwind for us in the first half. Additionally, we continue to invest for growth within the segment, including a full first quarter of drives in our results. Excluding the impacts from the Invenco acquisition and a full quarter of drives investment, our margin percentage would have increased year-over-year. Turning to repair solutions on slide nine. Revenue increased over 10% to $181 million in Q1. During the quarter, Matco hosted its annual expo event, which is traditionally the most significant stocking event of the year for our franchisees. Record sales at this event, coupled with easing supply chain conditions, allowed our teams to convert backlogs at a faster rate. An increase in net franchisee ads in the quarter further supported our top line growth. Operating profit of $47 million is in line with the prior year results, and operating profit margin declined 250 basis points due to timing of year-over-year reserve adjustments related to the finance portfolio. And finally, environmental and fueling solutions on slide 10. Reported revenues declined approximately 4% to $314 million. Baseline core revenues increased 10%, excluding the year-over-year impact from the sunset of EMV. As noted, U.S. dispenser demand is tracking ahead of our initial expectations, primarily the result of robust new site build and site refresh activity. Sales in both our environmental solutions and aftermarket parts businesses increased low double digits in the quarter. Demand for environmental solutions continues to benefit from regulations across multiple regions, as well as our industry-leading product offerings. And in aftermarket parts, we continue to leverage a large install base to drive growth. Additionally, Improved supply chain conditions enable GBR to continue converting backlog at higher levels, supporting sales outperformance in the quarter. Segment operating profit of $81 million is in line with the prior year results, while operating profit margin expanded 70 basis points to 25.7%. Execution on our previously announced restructuring actions, price-cost disciplined, and proactive supply chain management probe margin expansion. Just a quick note. As you may recall, one of the key initiatives from last year's CEO Kaizen event included focusing our engineering resources to expedite board redesigns ahead of component obsolescence, putting us on a much stronger footing as the broader supply chain conditions continue to recover. I'll now pivot to the balance sheet and free cash flow detail on slide 11. During the quarter, we repaid $65 million in debt, reducing our 2024 maturity, as you can see at the bottom right-hand side of the slide. Our night leverage ratio continues to decline sequentially, ending Q1 at 3.1 times. we maintain our commitment to an investment-grade credit rating and still expect that a leverage will end the year within our targeted range of 2.5 to 3 times on a net basis. With over $100 million in proceeds from the divestiture of GTT in April, we now anticipate paying down $200 to $250 million in debt for the full year, an increase of $50 million compared to a prior assumption announced last quarter. We have already redeployed 50 million of those proceeds to incremental debt pay down over the last two weeks. Additionally, we also completed approximately $18 million in share repurchases in Q1, which we mentioned on the fourth quarter call. We have outlined our modeling assumptions for GTT on slide 12, which includes an approximately 35 million impact to revenue, $10 million of adjusted operating profit, or $0.05 of adjusted diluted EPS. Through return-driven redeployment of proceeds for debt and share repurchases, we anticipate mitigating at least $0.03 of this impact by year-end. Over a 12-month period, we expect to fully offset EPS dilution related to this transaction. Turning to our outlook assumptions on slide 13, we're initiating Q2 guidance for adjusted EPS of 61 cents to 66 cents, which assumes a low to mid-single digit decline in core sales and baseline core growth of mid-single digits. We expect adjusted operating margins to decline between 65 and 105 basis points, with baseline operating margin expansion of 170 to 220 basis points. I would also remind everyone that Q2 is typically our seasonally low quarter for free cash flow due to the timing of cash tax and interest payments. Therefore, we expect conversion to be less than 50% in the quarter. For the full year, as Mark mentioned, while we remain vigilant, our end markets remain constructive. Dealing indicators like fuel margins, technician health, return on investment on car wash projects remain positive, and the view is supported by our customer conversations. Based on this and our strong first quarter performance, we are increasing our adjusted EPS guidance range to $2.77 to $2.87 Adjusting our prior guides for the 5-cent contribution of GTT, our new guidance increases by 9 cents at the midpoint, which flows through the upside in Q1 and incorporates the benefit from lower interest expense from our debt repayment. We are now assuming a core sales decline of low to mid-single digits, slightly ahead of our original guidance for a mid-single digit decline. and baseline sales growth of mid-single digits plus. No change to our margin assumptions. Also, I would note that our guidance is based on a share count of approximately 155 million shares and does not include the benefit from additional share repurchases, including the 50 million redeployment of GTT proceeds. With that, I will turn the call back over to Mark.