Vontier Corporation Common Stock

Good morning, ladies and gentlemen, and welcome to the volunteer third quarter 2023 earnings call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Thursday, November 2nd, 2023, and a reply will be made available shortly after. I will now like to turn the conference over to Ryan Edelman, one-tiered Vice President of Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning, everyone, and thank you for joining us on the call this morning to discuss our third quarter results. With me today are Mark Morelli, our President and Chief Executive Officer, and Anshuman Agha, 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. Please note that during today's call, we will present certain non-GAAP financial measures. 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 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. With that, I'd like to turn the call over to Mark.

Thanks,

Ryan.

Good morning, everyone. Thank you for joining us to discuss our third quarter results. I'll start with some of the highlights of the quarter beginning on slide five. We're incredibly pleased with our performance in Q3, which reflects progress on our connected mobility strategy -to-date and the strength of our differentiated portfolio. I want to take a second to recognize our employees around the world for their continued dedication to driving operational execution, delivering for our customers, accelerating growth, and demonstrating the power of the volunteer business system. We delivered strong top-line performance again this quarter ahead of expectations, with baseline core revenue growth of 10%. As a reminder, baseline core growth excludes the -over-year impact of the EMV comparison. The fourth quarter marks the end and also the peak of the EMV headwind, and we look forward to finally removing this comparison from our lexicon beginning next year. Both mobility technologies and environmental and fueling reported low double-digit baseline growth in the quarter. Within mobility tech, sales in our alternative energy solutions business grew over 20%, with DRB up low double digits, and Invenco by GVR also up low double-digit baseline. Environmental and fueling continues to benefit from the robust demand in our U.S. dispenser business, which has been consistent all year. Our leading share with large national and regional C-store and fueling operators puts us in a position of strength to capitalize on their strong reinvestment in expanding or modernizing their store footprints. Our customers are enjoying strong fuel margins, in-store sales growth, and healthy balance sheets. -to-date retail fueling site refresh and rebuild activity has exceeded our expectations, coupled with continued strength and new build activity driving higher equipment demand. The benefits of this broader reinvestment trend cut across many parts of our portfolio, including C-store forecourt and underground equipment, as well as car wash. Looking ahead, we're confident this will continue, given our strong visibility into customer project pipelines. Repair Solutions delivered 5% growth this quarter, supported by strong end-market dynamics, including healthy technician employment and wage growth. We are also benefiting from a strong product lineup, and this is a result of our industry-leading product vitality. Our -to-bill ratio was stable in Q3 at 0.97, relatively consistent with the trends we've seen -to-date and in line with what we are anticipating. Demand across the mobility ecosystem remains constructive, supported by continued investment in connected solutions that deliver enhanced productivity and automation. Leading indicators across the majority of our businesses remain healthy, and our backlogs remain elevated versus historical levels. Additionally, our customer channel checks have been encouraging. Recently, we conducted a survey in conjunction with NACS, the National Association for Convenient Stores, which showed that 85% of retailers are projecting flat to higher cap expense as a percentage of their net profits in 2024. This reflects the underlying resiliency we would expect of these end markets and gives us more confidence in our outlook. Excluding the -over-year EMV Compare, baseline operating margin expanded 40 basis points, demonstrating the power of VBS to deliver operational excellence through rigorous execution. Additionally, we generated incremental savings from the restructuring actions taken earlier in the year, and we're now tracking above the high end of our $45 million target for savings in the full year. We're still in the early innings of our self-help optimization initiatives as part of pillar one of our strategy, Optimize the Core, which over the next several years provides ample opportunity to expand margins in line with achieving our target of 150 plus basis points by 2026. Based on the strong results in Q3, we are updating our full year adjusted EPS guide, moving towards the top half of our previous range, which and Schuman will explain in more detail in a few minutes. Let's turn to slide six for a couple examples of how we're executing our connected mobility strategy. Demonstrating our continued commitments to decarbonizing fleets and mobility in general, we continue to accelerate the rollout of our hydrogen technology offerings. Last month, we unveiled the next evolution in our product roadmap with the first orders for our -the-art Turnkey hydrogen refueling station. This station is the first of its kind, a modular solution that enables fleet operators to scale their stations as they grow and transition to zero emission vehicles. We are leveraging our long-standing partnership with the Trillium Loves company, having provided them more than 40 compressed natural gas stations for fleet refueling. With them, we announced the first order to deliver our hydrogen fueling station. This includes a uniquely configurable solution of hydrogen dispensing and compression technology, as well as integrated cloud-based software. This system is going to Santa Clarita Transit in California to support the transition of their bus fleet to zero emission hydrogen fuel cell buses. Cloud connectivity ensures -in-class performance and uptime through remote monitoring and preventative maintenance, further backed by our extensive network of service technicians. Santa Clarita Transit's transition plan is further supported by the U.S. Department of Energy's commitment of $1.2 billion in federal funding to the state of California as one of seven regional hydrogen hubs under the $7 billion bipartisan infrastructure law. California is targeting 200 hydrogen stations across the state by 2025. Our alternative energy solutions business leverages our leadership in compressed natural gas substation design and production, which positions us well to benefit from the buildout of clean hydrogen infrastructure. This is not only in the state of California, but elsewhere in the U.S. and all parts of the world. This buildout is still in the early stages, and we see a multi-year opportunity for growth. On the right-hand side of the chart, we're excited to show you that we have announced the commercial launch of our first dispenser units to integrate the Invenco payment terminal at the NAICS trade show in early October. As you may recall, part of the synergy opportunity with the Invenco acquisition last year related to vertically integrating our own payment technology into our dispensers. Now, the FlexPay 6 lineup expands upon the industry's leading connected cloud-managed payment systems capable of -the-air updates to meet ongoing regulatory changes, enhance cyber protection, and maximizing asset uptime. It is also compliant with the latest payment card industry transaction security standard, or PCI-6, and offers a flexible solution for maximizing consumer engagement at the pump, customizable user experiences, and contactless payment. The integration of the FlexPay 6 into our energy delivery system is core to the Invenco deal thesis. It is a significant milestone on our product roadmap as we deliver -to-end cloud-enabled payment and workflow solution to convenience retail for energy delivery and in-store management. We've already seen significant orders in just our first month. The rollout of our NSX platform with both Shell and Chevron is going extremely well. Through the end of October, we deployed over 15% of Shell's 13,000 planned sites and are on pace to reach 20% of their sites by the year end. As a reminder, these first two wins cover over 20,000 sites combined, which equates to about 15% of all C-stores in the U.S., illustrating the differentiation of this offering. Additionally, the commercial pipeline for NFX continues to build with high levels of interest from our major customers across the mobility ecosystem globally. We continue to capitalize on the secular trends across the mobility ecosystem. The most important themes underpinning all of these is the need for greater productivity and automation and the need for multi-energy technologies to address the energy trilemma. We see an unparalleled opportunity for us to not only meet the demands of today, but lead and shape the future of mobility. Vontier is enabling the way the world moves, and that couldn't be more evident in our continued strong financial performance and key customer wins here today. Now I'd like to turn the call over to Ann Schuman to take you through the details of our financial performance and provide an update on our outlook for the remainder of the year.

Thanks, Mark, and good morning, everyone. I'll start with a summary of a third quarter performance. Please turn to slide seven. Reported revenue for the third quarter was $765 million, down approximately 3% from the prior year on both the reported and core basis. Excluding the impact of EMV, baseline core growth was approximately 10%. Total adjusted operating profit was $169 million, downwards of the prior year due to the expected headwind from the EMV sunset. Adjusted operating profit margin was .1% ahead of our Q3 guidance range. Baseline margin expanded 40 basis points, led by higher productivity and restructuring savings, as well as continued price cost performance. Adjusted earnings per share of 73 cents was above the high end of our guidance range, supported by higher revenue and improved profitability. Adjusted free cash flow for the third quarter was $128 million, up over 47% from the prior year and representing conversion of 113%, supported by continued improvements in working capital, including a $30 million reduction in inventory year to date. Given the strong ramp between the third and fourth quarter in the guidance we provided on our last call, our teams worked diligently through the third quarter to proactively rebalance the second half financial profile and de-risk the fourth quarter. Our results in Q3 and updated outlook for Q4 are a reflection of this operational success, as we were able to capitalize on strong demand for our industry leading solutions and deliver solid execution on restructuring savings and price cost. This was further supported by the continuation of normalizing supply chain conditions. Turning to a segment performance starting on slide eight. Mobility technology's top line increased over 8%, with solid performance across the board. Core growth for the segment was 4% and baseline core growth was 12%. PRB, our car wash solutions business, posted low double digit core sales growth for the quarter, as this business continues to gain share and demand for a ton of car wash solutions remains healthy. PRB has had an impressive track record of growth since joining the one-tier portfolio, and we believe this business is well positioned for above market growth into 2024. This growth will be fueled by demand for its core control software, point of sale systems, and data analytic applications, as well as the recent launch of Patsyon. Patsyon is a transformational cloud-based point of sale software platform for the ton of car wash market, designed to maximize a customer's operational efficiency and revenue growth through data-driven insights. Customer adoption and feedback has been very positive, directly benefiting operators who are focused on building a loyal customer and membership base and want a strong return on their investment. Our alternative energy solutions business continues to outperform, with sales up over 20%, driven by strong demand for compressed natural gas, refueling equipment, and systems, as well as the initial shipments of hydrogen dispensers. Invenco by GVR also had a solid third quarter. In addition to the ongoing deployment of our NFX platform, which is running ahead of schedule, we also announced an agreement with Portugal-based Galp Energia to deploy our PassportX point of sale system across its network of over 1,300 service stations in Iberia. PassportX represents a modern cloud-based software platform, purpose-built for fuel and convenience retailers. In addition to an advanced point of sale, it also incorporates integrated back office and head office workflow automation solutions to help retailers reduce site management complexity and address ongoing labor constraints. It also offers increased cybersecurity protection and improved customer experiences, supported by omnichannel and contactless purchase options, as well as personalized loyalty programs. We're proud to partner with Galp as we continue to ramp this offering. Segment operating profit at $51 million was ahead of our expectations, given the strong performance from DRB and Invenco and contributions from our FX transaction gain. Invenco profitability accelerated further, as anticipated, with margins on the base business now tracking in the mid-teens in Q3 and over 20% including synergies across the portfolio. Turning to repair solutions on slide nine. MATCO revenues increased 5%, led by over 20% growth in tool storage, as well as continued strength in our Power Tools lineup. MATCO continues to benefit from a strong demand environment as technician employment, wage growth, and auto repair demand remains at high levels. As lead times and several key product categories have improved year to date, we have capitalized on this environment with a steady cadence of new product launches. Operating profit while up sequentially was down versus the prior year as anticipated. Due to year over year reserve adjustments related to the receivables portfolio and a favorable tariff settlement recorded in the third quarter of 2022, as we previously communicated. As we close out the year, we still expect MATCO's operating profit margin to improve year over year in Q4 as comparisons ease. And finally on slide 10, environmental and fueling solutions. Reported revenues at EFS declined 10% due to the impact of the EMV sunset. Excluding this impact, baseline core sales growth was 13%, led by continued strength in our U.S. dispenser business, as well as strong demand for environmental equipment. As Mark referenced, EFS has benefited from strong industry capex trends year to date, which has led to healthy demand tied to site expansion and refresh activity, especially in our U.S. dispenser business. EFS segment operating profit margin expanded 60 basis points, primarily driven by the successful execution of the restructuring actions and continued performance on price cost. Turning to slide 11, I'll cover a balance sheet and free cash flow details for the quarter. We had strong cash performance in the third quarter with 113% conversion on adjusted net income and 17% of sales. Year to date, we generated just over $280 million with conversion at 87%, putting us well within reach of our full year target as we enter a seasonally strong cash generation quarter in Q4, which typically delivers over 100% conversion. We repaid another $75 million of debt in the third quarter, further reducing our 2024 maturity to $160 million. We also completed $12 million in share repurchases, bringing our total year to date repurchase to $62 million. We are maintaining a full year outlook for adjusted free cash flow conversion of 90% to 100%, which equates to over $400 million. Turning to the outlook assumptions on slide 12, starting with our updated guidance for the full year. Given our progress on the top line, year to date, we now anticipate a low single digit decline in core sales, which implies total revenues in the range of $3.075 to $3.085 billion. This includes an approximate $10 million headwind from FX versus our previous guidance. As Mark noted earlier, there is no change to our assumptions for the headwind related to the EMV sunset. As a reminder, this headwind ramps sequentially and peaks in the fourth quarter, and then we will finally move on from this comparison issue beginning in Q1 of next year. We are narrowing our adjusted EPS range to the top end of our prior range to $2.83 to $2.87. The implied fourth quarter guidance for adjusted EPS is $0.75 to $0.79 with revenues in the range of $770 million to $780 million. We will have a tougher top line comparison in Q4, which was up 10% on a core basis last year and includes the peak in EMV shipments, the initial benefits from normalizing supply chains, and revenue recovery following a supplier shutdown late in Q3 of the prior year. No material changes to our other planning assumptions for the full year, which I included as a slide in the appendix. The one call out, as I mentioned, is that FX is approximately a $10 million top line headwind relative to our prior guidance and is embedded into the outlook I just provided. With that, I will turn the call back over to Mark.

Thanks, Ann Schuman. Vontier is transforming and aligning our portfolio to deliver sustainable top line growth, industry leading profitability, double digit earnings growth, and significant free cash flow. Our connected mobility strategy and differentiated technologies continue to deliver wins, propelled by leading market positions in productivity and automation, and with robust secular tailwinds sweeping the mobility ecosystem. We're ideally positioned with our broad multi-energy portfolio to address the energy trilemma facing the world, the need for sustainable, secure, and affordable energy. Our differentiated software platforms for C-stores, car washes, fleets, and EV networks are solving high value customer problems, including increasing regulatory requirements, labor challenges, evolving consumer preferences, and network interoperability and uptime. Across all of our segments, we are positioned for future growth with a robust and growing pipeline of opportunities. Through our clear vision, leading edge technological capabilities, and unmatched touch points across the mobility ecosystem, we're enabling the way the world moves, driving smart, safe, sustainable solutions for our customers, employees, shareholders, and the world. With that, operator, we're ready to open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star 1. If you want to withdraw your question, please press star 2. Your questions will be pulled in the order they are received. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, good morning. This is Matthew Panon for Julian Mitchell. Just one question. You mentioned that you were tracking above the 45 million of savings target. Is there any spillover of incremental savings you could size for 2024?

Yeah, good morning. So we're tracking slightly above the 45 million closer to 47 to 48 million. And then the full year synergies is going to be about 56 to 58 million. So the incremental piece goes into next year.

Perfect. Thank you. And just to follow up, the mobility tech segment saw some pretty good margins in Q3. Is that just typical seasonality? And then is there any color you could give for Q4 for the segments or for total volunteer?

Yeah, so Q3 was a strong quarter for mobility technologies. They were helped a little bit by mix, but also the Invenco profitability has been ramping up sequentially. If you remember when we acquired Invenco, they were breakeven and their profitability increased to low single digits and high single digits in this quarter. They were in the mid teens on a standalone basis and including all in synergies, they were actually over 20%. So some of that benefit obviously continues. We also had a one time transaction, FX transaction gain in the third quarter, which obviously doesn't repeat itself in the fourth quarter. So expect Q4 margins for mobility technologies to be down about 50 basis points sequentially, but up materially from last fiscal year.

Great. Thank you very much.

Thank you. Your next question comes from Andrew Obin from Bank of America. Please go ahead.

Hi, this is David Ridley-Lane on for Andrew Obin. For your more CAPEX related sales, have you seen any impact on customers willingness to fund projects given the higher interest rates?

Yeah, David, this is Mark. We see a pretty healthy backdrop. One of the areas that we're obviously quite diligent on is watching the increase in interest rates and trying to have a good sense on how that might play out, particularly as we get into the next year. And I can tell you that our leading indicators all look good so far. One of the biggest areas for us is that folks get a lot of benefit from fuel margins as well as in-source sales within convenience stores. We also see continued good ROIs on car wash, even though the M&A activity certainly has slowed with higher interest rates. And so I think our setup for 2024 is a good setup. You know, one of the other areas that's been pretty interesting is our environmental business, as you may have recognized, saw high single digit growth in the quarter. There's been some de-stocking talked about in the industry. We certainly see that de-stocking, but we've been able to offset that with strength internationally based on our product lineup and also our distribution strength. So I think the fact that we've got really outstanding returns for folks that have money to spend is pretty outstanding. And we also have a great lineup of products. And if you sort of look at our history here, we're offering a lot more new products to market than we ever have. In fact, we've quadrupled our new product introductions, and I think we've got a really great lineup going into 2024.

And then as a kind of a quick follow up, I mean, how much of the growth in DRB are you getting from the natural upgrade cycle to Pantheon and the revenue list that you get there? I guess, I'll set another way, you know, how sustainable do you think these growth rates, double digit growth rates that you're getting in DRB are?

So we've recognized from slowing in the industry, as you know, we grew more than 30%. It's now in double digits. We see that coming down a bit as well. What's essentially happened in the industry is that there's been a tremendous build out. We had a recent conversation with a customer that had more than 100 car washes. And they're, you know, the interesting thing about that dialogue is that, you know, they spent through 2022 really building out their infrastructure or building out the car washes. And 2023 has been a year where they've really been focused on building up, meaning making more operational efficiency, sweating their assets more. And the answer is really specifically about it. You know, Pantheon is a new offering to the market. It really is targeted at enabling car wash operators to be more effective with operational excellence, getting more throughput through which drops through to the bottom line, which is a good return on investment for them. And so I think that positions us well for the market dynamics heading into 2024 and we anticipate further growth as a market leader here.

Got it. Thank you. And then just one quick numbers kind of question in the repair solutions. When you lap the year over year, reserve related adjustments and did you did you quantify the impact in the quarter? I may have missed it.

Taking the first part of your question, the reserve related adjustments, the headwind ended in Q3. Q4 is actually an easier compare and Matt goes margins are going to be up materially in the fourth quarter actually closer to 400 basis points up year on year for Q4. The whole decline in Q3 year on year was really between the reserve adjustments and about a two and a half million dollar tariff settlement that those were the two drivers for the year on year decline in Q3.

Thank you very much. And congratulations on the quarter.

Thank you. Thank you. Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question come from Rob Mason from Bird. Please go ahead.

Yes. Good morning. I joined a little late, so I may not have caught this entirely, but I thought you talked about the risking the second half or actually the fourth quarter a little bit. I inferred that some of the third quarter upside that we saw was related to that any particular areas that you would call out. You know, so added strength due to that in the third quarter.

Let me start this off. I'll let in human jump in as well. Yeah, I think what we you may have seen our setup in the second half for Q3 had a really strong ramp also in Q4. And so what we are essentially able to do with some of our supply chain and customers, they've freed up some labor product availability, both for convenience store, you know, build out from not only the the build out of the convenience store and dispensers, but also a bit on the car wash side too. So that gave us an ability to pull, if you will, you know, Q3, the Q4 demand in the Q3, which which we're still raising full year, but it really enabled us to D risk Q4.

We,

we saw that both in fueling and mobility technologies as, you know, our customer supply chains of ease, but their project construction schedules, we were able to pull in some demand both on the fueling side above and below ground and then on the mobility technology site. Also on the car wash side as projects have continued to move, there's still a lot of demand for green fields and as their construction schedules of these some ups, we saw some upside out there. So overall, we're very pleased with the risking the second half of the year and with the strong results for the quarter.

I'm at it. I might add it gives us a really good set up for 2024. I think we feel like there's some healthy demand here. We've got a great product lineup. I think our price cost is not too out of balance here. So I think we just feel like we're in a good position, bring an inventory down as well. So we feel optimistic entering the new year.

Mark, just around that the commentary kind of reference previously just around how you're monitoring the impact of higher rates and thinking about the dispenser business in particular, just given all the refreshes, the rebrands and new site bills, etc. I would think all the permitting involved, there's probably good lead time on that as well. How far out? I guess how much visibility forward visibility do you have into some of that activity? And yeah, that's the question.

Yeah, well, first of all, this is where we're positioned really strong. We're we lead with the leading players in the market. The large regional national players are really in our sweet spot. And so we have very regular conversations with them. As you can imagine, they have a lot of cash to put to work from their balance sheet. They've been making outstanding margins on fuel as well as in store sales are going up. And so they're a very successful business models and they continue to build out their footprints. And so the visibility is well into next year. As you can imagine, you don't you don't do a site approval. You don't arrange these things. They look out. And in many cases, even more than a year, they're they're working on building out and buying the location is very important to them to making sure they're buying the right locations and supply chains have certainly ease, but their activity continues to go forward. And this is where we base some of our visibility on where we feel really good about our position and our set up. Now, it's hard to say what's going to happen on macro economic environment, but also this the footprint that we have has been pretty resilient and prior downturns.

Just last question around the alternative fueling area. C and G was noted as a strength perhaps this quarter, but just how should we think about the timing and the influence of the hydrogen aspect of that business in terms of a ramp? And I'm curious as well how you think that mix would look over time from just the dispenser side versus maybe more that total turnkey solution that you also highlighted.

So, it's mostly as you can imagine, compressed natural gas, renewable natural gas today. We're just launching the hydrogen offerings. I think it's early to market with review as a leading offering that focuses on high reliability on the dispenser side. But also the turnkey solution is also pretty innovative and folks need this. They've been asking us for this solution for a while. Pull this into this space based on our high reliability and based on our ability to provide products that address safety and regulatory challenges that are very similar to compress natural gas. So, it's really in our sweet spot. So, we feel pretty good about that going in next year. A lot of government funding behind this bipartisan support. It's also internationally. It's not just in the US. So, there seems to be quite some legs. You know, it's interesting when folks look at our business, they should really think about this energy trilemma we talk about and the sustainability theme means not just electrification, but certainly we think there's a lot of legs to renewable natural gas also to the hydrogen. And we're very well positioned here to lead. So, we're optimistic that you're going to see more of a growth on the hydrogen as we get into next year. It's been more than 20% grow in the quarter and it's been doing pretty outstanding over the last year as well.

Very

good. Thank

you. Thank you. Mr. Domen, there are no further questions at this time. You may proceed.

Well, thanks everybody for joining us on today's call. I'm super excited that we're having ongoing operational execution and performance. I'm excited about our outlook, our setup for 2024, and we've made significant progress on our portfolio transformation. I think that's reading through as well. So, we look forward to meeting and seeing many of you on the road. Have a great day.

This concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.