Vontier Corporation Common Stock

If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, February 15, 2024, and the replay will be made available shortly after. I would now like to turn the conference over to Ryan Edelman, Volunteer's Vice President of Investor Relations. Please go ahead.

Thank you. 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 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 at investors.vonteer.com. 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 the forward-looking statements is available on our website and in our SAC filings. With that, I'd like to turn the call over to Mark.

Thanks, Ryan, and good morning, everyone. Thank you for joining us to discuss our fourth quarter results. I'll start with some of the highlights of the quarter beginning on slide five. Our teams delivered a solid finish to a year marked by strong operational execution and significant progress on our strategic initiatives and portfolio transformation. Overall, Q4 played out largely as we anticipated. We delivered baseline core sales growth of 5% toward the higher end of our guidance range and strong performance on top of the 10% growth in the prior year. We saw continued momentum across the portfolio, including strength within our alternative energy, DRB, Matco, U.S. dispenser, and fueling aftermarket businesses. End market demand remains constructive, supported by continued investment in the mobility ecosystem, especially for solutions that deliver enhanced productivity and automation and multi-energy solutions that enable decarbonization. We continue to see evidence of these demand trends in our order funnel and in direct conversations with our customers, distributors, and channel partners. Encouraging signs as we now move past the EMV comparison issues and channel inventories continue to normalize, our book to bill will inflect above one. We delivered another quarter of strong underlying margin performance, reflecting the power of VBS and our culture of continuous improvement to drive increased productivity savings and execute on our restructuring initiatives, as well as favorable price costs. As N. Schumann will share with you in a few minutes, we are initiating our 2024 guidance, which is the first time post-spend we will be free from any EMV-related adjustments. After three full years of headwinds, we are thrilled to have this comparison issue behind us and eager to demonstrate the strength of the VONTIER portfolio and tangible shareholder value creation potential. We are confident in our outlook, not only for 2024, but also in our longer term financial targets. I'm encouraged by the trends we are seeing in our sales funnels. We're gaining significant traction on our connected mobility strategy. We are well aligned with the secular tailwinds benefiting our industry for the next decade plus. Turning to slide six. Monteer is well positioned to capitalize on underlying secular tailwinds that are driving significant investments to modernize infrastructure that enables the way the world moves. We serve the mobility ecosystem, which as we shared with you during our investor day last year, unites all the infrastructure critical to the movement of people, goods, data, and energy. We size our addressable market at approximately $30 billion, which is growing at a mid single digit rate over the next several years. This ecosystem is evolving rapidly, motivated by new technologies that enable more connected, more sustainable mobility. We believe Vontir is uniquely positioned in this end market with a clear right to lead this evolution, leveraging a large installed base and track record of innovation. As a result, as we continue to execute our connected mobility strategy, we expect this TAM to expand even further. Our growth framework is supported by three secular tailwinds that will positively impact our end markets over the next decade and cut across all three segments. The energy transition influenced by more prevalent decarbonization and compliance, increased complexity driven by industry consolidation, changing consumer preferences, and increasing regulation, and global labor challenges related to the availability of a skilled workforce. These secular trends are already driving significant investment by our customers as the industry consolidates and the benefits are going to those that are more productive and better able to attract consumers. We believe the solutions to these challenges require outcomes that enhance productivity across our customers' asset base, as well as a multi-energy approach to refueling all vehicle types. While the secular trends cut across our entire portfolio, customer needs are unique to the individual end market, which underscores our rationale for aligning our segment structure to capitalize with the differentiated solutions. On the bottom of the page are common sets of end market needs for each segment, which highlight the necessity for more advanced technologies and solutions that solve unique challenges. These needs have been identified by years' worth of customer back market research and have been embedded within our engineering and product development process since shortly after the spin. Mobility technologies represents just over one-third of our revenue. This segment focuses on integrated solutions for mobility hubs, including connected hardware and software packages tailored to specific mobility verticals, that enable our customers to manage the complexities inherent in their businesses. It also includes solutions that enable our commercial and industrial fleet operators and EV charging network operators to meet their decarbonization goals. Repair Solutions is incredibly well positioned for the energy transition, with an agile business model capable of providing tools for any vehicle type, while also focusing on developing advanced tools to deal with the increased complexity of repair and manage the widening technician shortage and skills gap. Environmental and fueling solutions, where we have significant competitive advantages in above ground and below ground equipment, is capitalizing on the build out and modernization of the global convenience retail and fueling footprint, as well as environmental sensing and monitoring devices to achieve regulatory compliance. Our connected mobility strategy on slide seven provides us with a clear template for how we deploy resources to capitalize on the customer needs we just discussed. When combined with unmatched portfolio depth and breadth and deep domain expertise, our strategy to connect, manage, and scale assets across the mobility ecosystem represents a unique value proposition for our customers who are dealing with a number of challenges that are increasing their operating costs and the complexity of managing their assets. What they're looking for is a way to keep their operations running smoothly while maintaining high asset uptime at the lowest total cost of ownership while optimizing revenue and profitability. Our strategy strikes at the heart of this challenge by connecting the physical infrastructure, managing it through our leading digital platforms, and then scaling it through high valued applications. Ultimately, most value delivery happens through physical systems. Because our incredible install base interacts with a vast majority of the mobility ecosystem, we're able to create customer benefits through network effects. Decades of established domain expertise in the verticals we serve, unmatched breadth and depth of the portfolio, and the fact that our growth strategy is well aligned with the largest enterprise customers are all keys to our sustainable competitive advantage. By combining our domain knowledge with agile digital platforms, we have an opportunity to disrupt our markets, evolving from historically siloed systems to an integrated architecture. When we apply connectivity and digital applications we can fundamentally change the way our systems utilize and interact with their infrastructure. Some of the more common outcomes we can deliver with our solutions are listed here on the page. I won't go through each of these, but the key message is these outcomes would not be possible without digital platforms. This strategy is the culmination of several years of increased focus post-BIN. On slide eight, Through focus, engineering, and R&D rigor and VBS, we have flipped our spend profile, doubling the amount spent on new product development since 2020. The result has been a six times increase in the number of new products launched since then, with 20 new to market products or solutions launched in 2023. This is giving us an ability to capitalize on secular drivers to improve organic growth. Let me turn the call over to Ann Schuman to walk you through the details of the quarter. Ann Schuman?

Thanks Mark, and hello everyone. Let's start off with a summary of the fourth quarter results on slide 9. Sales of $789 million in the quarter declined 7% on a core basis against the peak headwind related to the year-over-year EMV compare. On a baseline core basis, Excluding the EMV compare, sales increased approximately 5% for the quarter towards the higher end of our guidance range, led by low double-digit baseline growth at Mobility Technologies. The fall year 2023, total company baseline core sales grew approximately 9% as our teams capitalized on solid end-market demand, leveraging our leadership positions and robust new product pipeline to deliver value for our customers. Price contributed a little above three points of that growth, demonstrating solid underlying volume performance as well. Adjusted operating profit for the fourth quarter was 174 million, down versus the prior year, as anticipated, given the EMV-related headwinds. Adjusted operating profit margin in the quarter was 22%, up about 20 basis points as a result of our ongoing restructuring and productivity savings. as well as positive price cost offset in part by EMV headwinds. Additionally, Q4 was negatively impacted by an FX transaction impact related mainly to hyperinflationary economies, which equated to a headwind of about $6 million or about 80 basis points of margin for one tier in total. On a year-over-year basis, the FX transaction impact was about a $5 million or a 60 basis point headwind. Baseline core margins expanded 380 basis points during the quarter, and for the full year 2023, improved over 180 basis points. Adjusted EPS at 80 cents was slightly above the high end of our guidance range. Operationally, results were in line. The approximate 3 cent FX impact I mentioned was more than offset by a pickup below the line from lower tax expense. The lower tax rate in Q4 is the result of proactive global tax planning actions executed in the quarter, which included a catch-up benefit for the full year. Going forward, we expect the effective tax rate to be between 21.5 and 22%, a 50 to 100 basis point reduction from a prior rate. We'll spend more time on free cash flow in a few slides, but we closed out the year on a strong note with 122% conversion in the fourth quarter. We are incredibly proud of our performance this year, as our teams executed extremely well, leveraging the volunteer business system to continue to unlock value from our operations while navigating the end of the EMV cycle. We delivered on all our financial commitments for the year, continuing our track record of strong operational execution. Moving on to slide 10, our mobility technology segment performed well through the fourth quarter with mid-single-digit core sales growth and baseline core growth of 12%. All operating companies within the segment reported sales growth in the fourth quarter led by alternative energy solutions up over 20% in the fourth quarter and up over 30% for the full year as increased adoption for low-carbon fueling solutions spanning compressed natural gas, renewable natural gas, biofuels, and hydrogen continue to drive growth. BRB also reported a solid fourth quarter with mid-single-digit growth and anticipated moderation from well above fleet average growth on a difficult comparison with the prior year, where sales grew over 40% in the same period. BRB continues to see a build-out of new tunnel car wash sites, gaining share with good traction from the ramp of Pathion, a new cloud-based software solution designed to improve operational efficiency, scale seamlessly, maximize revenue generation, and enhance the consumer experience for car wash operators. At Invenco, the NFX ramp is progressing well and remains on track with over 20% of Shell's 13,000 planned sites now deployed. Customer conversation and pilots are ongoing with a robust pipeline of opportunity. For the full year 2023, mobility technologies baseline core revenues increased over 12%. a true testament to the value of our integrated solutions across the mobility ecosystem. For example, Invenco by GVR nearly doubled the number of connected devices shipped in 2023 to approximately 250,000, which validates the value proposition we offer to our customers to connect, manage, and scale their assets. Margins at Mobility Technologies improved 180 basis points from the prior year ending the quarter at 20.6%, with strong contributions from Alternative Energy Solutions and Invenco by GVR, and despite a headwind from the FX transaction impact I referenced earlier. Turning to slide 11. Repair Solutions delivered core revenue growth of 5%, led by continued strength in our tool storage business, up 30% this quarter, and over 20% growth in our diagnostic tools category following the launch of our MAX 5 advanced scan tool. Demand for high-ticket items like these reflects the underlying health of the service technician, with employment and wages continuing to climb. Looking back at the full year, repair solutions delivered nearly 7% core growth, driven by robust underlying demand and an excellent product lineup, an outcome of our industry-leading new product vitality. Operating profit grew approximately 16% year-over-year to $38 million for the quarter, with operating profit margins of 25%, up nearly 250 basis points, driven primarily by stronger volume, productivity savings, and favorable price cost. And our final segment, environmental and fueling solutions, on slide 12. EFS revenue declined roughly 20%, reflecting the impact of the EMV sunset. On a baseline core basis, sales increased 1%, slightly ahead of what we were expecting, driven by upside in our U.S. dispenser business and low double-digit growth in aftermarket parts, where channel inventory is normalized towards the end of last quarter. For the full year 2023, EFS reported baseline core growth of 8%, due in part to the strength of the U.S. dispenser demand which tracked ahead of expectations through 2023. Industry consolidation and continued site build-out and modernization by our large national and regional customers supports our growth. Tailwinds from regulatory changes both in the U.S. and abroad also contributed to growth, driving strong underlying demand for environmental solutions. Although sales in environmental were essentially flat in Q4, As we continue to experience some destocking headwinds in our North America business, this was offset by growth across our international business. We are mostly through destocking headwinds and expect a modest amount to carry through in the first half of 2024, but channel inventory is returning to normal in the second half and this business returning to attractive growth. EFS segment margins of 28.9% were in line with the prior year as restructuring savings and the benefit from price cost were offset by EMV-related headwinds. Moving on to the free cash flow and the balance sheet on slide 13. Fourth quarter adjusted free cash flow was $153 million, representing conversion of 122%. Full year free cash flow increased nearly 40% to $436 million, with adjusted free cash flow conversion of 97%, within the top half of our full-year guidance range. Cash flow from operations was also up 40% over the prior year, driven primarily by strong working capital management leading to a $50 million decline in inventories. Strong free cash flow generation in addition to the strategic deployment of GTT divestiture proceeds earlier in the year enabled us to pay down $300 million in debt in 2023 and repurchase $75 million in stock. With this, we ended the year with a net leverage ratio of 2.8 times, well within our target range for the year, and a material improvement worth of 3.2 times in 2022. As we look ahead to 2024, we remain committed to our investment-grade credit rating and plan for another $100 million in debt pay down. We will maintain our focus on returns-driven capital allocation, evaluating additional buybacks and bolt-on acquisition opportunities. Turning to the outlook on slide 14. Having successfully navigated the EMV compare, we are eliminating any reference to baseline core metrics. Going forward, we will issue both reported and core sales growth. For the full year 2024, we expect core revenue growth of 4% to 6% and reported revenues in the range of $3.05 to $3.11 billion. All operating segments are expected to contribute solid growth in 2024 as the strong secular trends underpinning the mobility ecosystem, many of which we have talked about today, continue to further the advancement of our industry-leading solutions. We expect full-year adjusted operating margin expansion of 80 to 110 basis points, reflecting another year of solid operational execution, partially offset by continued reinvestment in innovation. This would include increased R&D at Invenco and DRB, as well as our evolved business, all of which will strengthen our industry-leading position and accelerate market growth. Adjusted EPS is expected to fall in the range of $3 to $3.15. We expect free cash flow conversion in the range of 90% to 100%, a normal operating range for one tier. However, this does assume a modest increase in capex spend to support our growth outlook. We have provided you with some other P&L assumptions relative to our guide in the appendix of this deck, just to walk through a few of those briefly. The vestiges will be a headwind of nearly $150 million for the full year. Based on our plan for additional debt pay down and assuming current rates, interest expense will be a tailwind year over year at $80 to $85 million. With the tax planning actions taken in the fourth quarter, our tax rate for the full year should track between 21.5 and 22%. We model an outstanding share count of approximately 155 million to 156 million shares. For the first quarter, we expect revenues in the range of 745 million to 760 million on core growth of 2 to 4 percent and adjusted earnings per share of 68 cents to 72 cents. From a seasonality perspective, we expect Q1 sales and operating profit to be approximately 24% and 23% of the full year, respectively, which is in line with our historical norm. For the full year, we expect second half earnings to be around 55% of the total year, also in line with our historical seasonality. Overall, we believe our outlook reflects another strong year of performance from one tier. With that, I will turn the call back over to Mark to wrap up.

Thanks, Ann Schuman. I'll wrap up with a few quick comments on slide 15. We made significant progress on our strategic initiatives in 2023, and I couldn't be more proud of what our teams have been able to accomplish. We delivered on our financial commitments, exceeding many of the original guidance targets provided in February of last year, drove incremental operational and commercial success through VBS, remain disciplined on capital allocation, and continue to transform our portfolio. We entered 2024 in a position of strength and with significant momentum given the progress we made last year. Our markets are constructive, underpinned by strong secular drivers, and we're advantaged by our leading share positions with the largest players in the mobility ecosystem. The investments being deployed across our end markets are verification of the value being placed on improving productivity enabled by our integrated solutions. This is a unique advantage for Vontir as the build out and consolidation of end markets continues. This puts us in a solid position for sustainable above market growth and top quartile free cash flow as a percentage of sales. Our guidance for 2024 puts us squarely on the path to achieving our long-term targets. I'm confident we have the right strategy in place to deliver differentiated solutions for our customers and unlock value for our shareholders. With that operator, we're ready to open the line for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the number one on your touchstone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star, followed by the number two. If you're using a speakerphone, please lift your hands up before pressing any keys. One moment, please, for your first question. Our first question comes from the line of Andy Kaplowitz from Citi Group. Please go ahead.

Good morning, everyone. Good morning, Andy. Good morning. Mark, you mentioned your book-to-bill could inflect above one times and that your sales funnel is improving, but maybe you could talk a little bit more about that. Are you already seeing that order inflection as you go through Q1? Where do you expect the biggest inflection in order growth in the portfolio? What's baked into your 4% to 6% core revenue growth guide for the year?

Yeah, so first of all, we've been pretty encouraged that our book to bill is hung in there through 2023. You know, it's just been hovering just below one fairly steadily. And that's been encouraging because we've obviously had to face reducing lead times, some, you know, minor destocking issues. But so that I think the demand has been there. I think as we work through those further headwinds, into 2024, I think these secular drivers are still at work. I think we've got a lot of momentum coming out of the year. I think it's, you know, pretty hard to exactly call when the book to build will inflict above one, but we're seeing sort of the legs of the work that we've been doing with the backdrop of these secular drivers and these integrated solutions that we're having in the marketplace are getting good traction with our customers, you know, based on serving the market and the secular drivers and some of the larger players in the industry that are consolidating. So all these are really good signs. Our channel checks are going well where we're looking at the build out and the demand of the infrastructure. It certainly seems to be there. Keep in mind, most of our customers are also not necessarily dependent on the interest rate environment. They've got really strong balance sheets, really flush with cash. these folks are continue to build out and they're looking a little bit further down the road with that infrastructure build out and the decisions they're making to do that and these are the folks that we have a leading chair with so we feel pretty encouraged on what we see in the 2024 of course a lot of 2024 in front of us uh so it's hard to tell everything that will happen but for what we see right now i think it's pretty encouraging it's helpful mark and then i just want to focus on environmental fueling solutions for a second i think you said

you know, baseline core growth was, you know, fine and better than you thought. But could you give us a little more color regarding, you know, that tradeoff between sort of the destocking in environmental in North America versus the international strength? I assume you expect continued muted overall core growth for that segment through the first half of the year and then gets better in the second half. Is that the way to think about it?

Yeah. So first of all, 23 was, you know, a really strong year for that platform. I think it really shows that the secular drivers are at work. Um, and I think the, the product launches we've done there have, uh, have, have served us well, uh, through 23 as, as we get into, um, the, the 2024 cycle, you know, we did indicate there was a small portion of our business exposed to de-stocking on about 15% of revenue. And we're working through that pretty well. I mean, the aftermarket parts was one area that we saw, you know, destocking last year. And we think we're through that. We saw Q4 with double-digit growth in aftermarket parts, which has been a great business for us. I think it's benefiting from the fact that we gained share during the EMV cycle. We have a great install base, and we've really focused on that as one of our profitable growth initiatives. And so getting through the destocking there, I think it bodes well for 2024. And then on the underground side, which also experienced some destocking there, we're mostly through that. I think we performed well in the quarter. International markets were really strong on environmental offset, some of the destocking, some of the weakness in North America. So overall, a really good performance on environmental. But more to your question, As we get into 2024, you know, most of that destocking is through some still pockets of it on the West Coast, and we should be through that in the first half. So kind of getting to your point here, we see a good backdrop. Shuman, you want to add anything there?

Yeah, just from a seasonality perspective for environmental and fueling, Q1 should be a good growth quarter for them. They should be growing mid-single digits for the quarter. So, I think the business is performing well and a lot of the innovation on the environmental side is supporting our business also.

Great to hear that. Thanks.

Our next question comes from the line of David Ridley Lane from Bank of America. Please go ahead.

Good morning. You know, you have a competitor in Matco that had year-over-year declines in sales this quarter, and they called out particularly the higher-priced items. You know, look, your results, very steady growth. So what do you see kind of in the market? Any difference between your, you know, sell-in to the franchisees versus the sell-through? Obviously, you're expecting, you know, continued growth in 2024. What are you seeing that gives you that confidence?

I'm going to make some comments and also turn it over to Ann Schuman. First of all, to specifically answer your question, the market backdrop is pretty strong for the auto technician today. I don't think it's any secret that employment is at an all-time high and the wage rates are also at an all-time high. I think the thing that might weigh on the service technician is just sort of the backdrop with overall raising prices as a consumer. And certainly if they're buying other things that they're paying more for it, certainly with higher interest rates as well. And so that could certainly impact some of the buying behavior. So we've been very carefully looking at that and watching that. And I think the thing that has bode well for our growth is that we just had a really strong product lineup. You know, one of the areas we differentiate ourselves on is that vitality, bringing new products to market. I think we've just had an excellent lineup this year. We've launched a new diagnostics platform that's going well. Our power tool lineup has been doing outstanding through 2023. And then our toolbox factory has been on the mend. We are actually seeing a movement of higher priced items in this market environment, which I think has been encouraging to us. It's hard to say exactly what 2024 will bring in this regard. So we're watching it carefully, but at the same time, we've been pretty darn encouraged with the the results that we've been getting in the marketplace. And Shuman, you want to add anything there?

Yeah, I'll just add to your question about sell-through. So when you look at the fourth quarter, we were up about 5%, but when you look at the completed business of our franchisees, really the sell-through on a year-on-year basis, the average weekly completed business was up about 6%. So good sell-through, so it's not an inventory issue that's building up. So overall, a solid quarter, as Mark talked about, good product vitality that helped drive it with a healthy technician, but we continue to monitor the space.

And just a quick follow-up. You know, I know that divestitures are going to throw off incremental margin calculations, but can you, you know, just sort of bridging from kind of 2023, how much restructuring cost savings are in the that bridge versus kind of the core organic profit growth?

There's about 8 million of restructuring benefit in 2024, which is a carry forward from 2023. Yes, the portfolio shift does help roughly 50 basis points. But if you look at our drop through on the ex divestiture part of the business on the growth, we're doing about a 30% drop through. despite some higher R&D expenses as we continue to build out our leading position in Venco, in the car wash business, and in Evolve. Thank you very much.

Just a reminder, should you have a question, please press star, followed by the number one on your touchstone phone. We have our next question coming from the line of Julian Mitchell from workplace. Please go ahead.

Hi, good morning. Maybe just wanted to try and understand sort of how you're thinking about organic sales growth for the year and margin expansion across the three segments. You know, which ones you think kind of lead growth or have the lowest margin expansion? Any sort of cover around that, please?

Hi, Julian. So I'll start with that. So when you think of the three segments, let's start off with mobility technologies. Mobility technologies, We should have mid-single digit to high single digit growth in that segment. Operating margins will be flat to slightly up despite the higher R&D. This business has good drop through and as it expands and grows, that really helps us. The repair segment, that should be a low single digit to mid-single digit growth. The operating profit margins roughly in line with the previous year. And then our environmental and fueling business should grow about mid-single digits with higher margins and some margin expansion out there.

That's very helpful. Thank you. And then just my second question would be around thoughts on capital deployment. You know, how much leverage do you think or how much firepower do you have available for the year ahead? What's the appeal of sort of M&A versus buybacks at your current price? And I think you have about 100 million or so of debt reduction dialed in for that interest guide. Is that the sort of maximum debt reduction or could there be more?

Yeah, maybe I'll start off and then Mark will also chime in. So the debt reduction will probably be limited to the 100 million. As of now, we have a maturity of a term loan with 100 million left on it. So we'll pay that off. You know, from a leverage perspective, it said we'd have a leverage ratio of two and a half to three times at 2.8 times we're squarely in that. So just maintaining our leverage in that range. And then from a firepower perspective, obviously, we are a good cash flow generator and 90 to 100% free cash flow generation. We also did have the Hennessy sale proceeds, which came in in January, a little over 70 million. From a capital allocation perspective, we will be very disciplined as we have demonstrated in the past. We are very returns driven and we are patient. So just expect returns driven focused capital allocation from us. Mark, do you want to add something?

Yeah, I'll just reiterate that, Julian, that we feel that we've really demonstrated a very disciplined approach on the capital allocation. And it's something I think we think about a lot. We spend a lot of time thinking through the different avenues for this. And we're extremely disciplined and very patient with how we figure these things out. So we don't feel in a rush to do M&A, if that's maybe what people might think. But we will have M&A part of the equation in bolt-ons. um when the when the the right hurdle rates are met and the right uh strategy kind of plays out for us so uh very strategy led on that and then i think more more of what we've done in the prior year uh i think has worked really well so we continue to spend time on this and i think you're just going to see a very disciplined approach that's great thank you thanks julian

Our next question comes from the line of Rob Jamieson from UBS. Please go ahead.

Good morning. Congrats on the results this morning. I just want to focus a little bit on MCN and Venco. Sounds like the NFX deployments for Shell are progressing nicely. I wonder if you could just talk about the pilot programs that you mentioned. You know, how does this play out from a timing perspective? Are these with like larger chains that are testing a few sites? And then, you know, how long does this pilot program last before it might like convert into a win?

Uh, so thank you for that question. We've been super excited about the progress we've been making with in effects platform and, um, Shell's going really well. We've, um, deployed, uh, pretty significant amount, almost maybe 25% of that free large order. If you may remember. We accepted orders from Shell and Chevron that represents about 15% of the USC store installed base. So some really big orders there. And so the fact that we're progressing through them really nicely in the rollout, I think bodes well. I think there's other large names that are out there that are piloting it. They're taking very close interest in some of the productivity gains they get from this platform, which is really one of the central issues that they are facing is how do they manage that infrastructure in a more productive way and this platform really fits exactly into that need. So a lot of attention on it and I think we'll keep you posted and we've done press releases in the past and we'll keep you posted as we continue to get wins. You know, our pipeline is no question growing for this offering and keep in mind that that's just for the payment aspect, we also have Think of NFX more as a site management platform. And so we have a lot more build out around the NFX platform on site management related productivity and automation, which is an outstanding theme with some great secular drivers behind that for the mobility ecosystem. So we're excited about it and there'll be more to come.

That's great. Thank you for the color there. And then, you know, the solid free cash flow generation in the quarter and conversion, you know, can you just talk about some of the opportunities in 2024 and how you might drive higher conversion?

Yeah, I think a 90% to 100% free cash flow conversion is the hallmark of our business, so we'll continue to drive that. We have strong working capital management initiatives in place. which span all aspects of our balance sheet. We continue to look at inventory, how we can optimize inventory while meeting customer demand and keeping lead times down. Obviously, we're very focused around collections and payables also. And there's a lot of talk around some of the R&D from a tax perspective, whether the Senate passes that. That's definitely some potential upside if that happens. about $20 million upside from that if that happens.

That's great. And sorry, can I sneak one more in on Matco? Just on product vitality, I mean, I know that's something that you called out in the slides. Can you just talk a little bit about that process? Like, are you kind of reaching out proactively to mechanics and trying to figure out what attributes they're willing to pay for when you're developing these products? But just curious kind of how you approach that. Thank you.

Yeah, it's a long-standing part of our business model in Matco where, you know, we're pretty nimble with our supply chain and through our suppliers. So we heavily engage our supply chain with a team that focuses on the market and on the high-value problems that service technicians are facing. You know, one of the biggest issues for a service technician is how do they How can they be more productive in the shop? How can they make sure they're not running into problems? They have the right tools and capabilities. And if they can do things that drop their time and have higher efficiency in the shop, then that's a major boom for them. And they're certainly willing to pay for that. And they don't ever want to approach a situation where they might bog down the shop or bog down their productivity. As you know, if you've ever had your car repaired, recently, you know, it's just difficult, just the overall labor challenges and the complexity repair is going up with new modern vehicles, including electric vehicles, things are more complex. And so that is a great backdrop for our business model, which really focuses on this productivity aspect within the shop. And I think what you're seeing is our product lineup this year has been just great. I think we've identified the right issues that that can help the service technician, and they're certainly willing to spend in that environment.

That's great. Thank you for the color. Thanks, Rob.

There are no further questions at this time. I'd now like to turn the call back over to Mr. Morelle for final closing comments.

Yes, thanks for joining us today. I'm really excited about our operational performance through 23. Our outlook for 2024 also is reflective of the significant progress of our portfolio transformation and the momentum that we have. I can tell you I am not more thrilled to have the EMV cycle behind us and look forward to a clean core growth in 2024. I'm incredibly proud of our team and I look forward to further executing on our connected mobility strategy. So we look forward to seeing folks on the road in the coming weeks. Have a great day.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.