Vontier Corporation Common Stock

Good morning ladies and gentlemen and welcome to the volunteer first quarter 2025 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 zero for the operator. This call is being recorded on Thursday, May 1st 2025 and a replay will be made available shortly after. I would now like to turn the conference over to Ryan Edelman, Ventures 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 first quarter results. With me today are Mark Morelli, our President and Chief Executive Officer and Enshuman 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 .vontier.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 meanings 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, please turn to slide three and I'll turn the call over to Mark.

Thanks, Ryan and good morning everyone. We had a strong start to the year with first quarter sales, adjusted EPS and adjusted free cash flow seen in expectations. Other than expected performance at environmental and fueling solutions and mobility technologies which grew low double digits drove core sales above our guidance range. These results demonstrate unique competitive advantage within the mobility ecosystem with a purpose built portfolio, a connected hardware and software solutions. Our connected mobility strategy places us at the forefront of our customers digital transformation journey and offers optionality for their energy needs. Where this is most evident today is within our convenience retail and fueling and market where we continue to capitalize on strong industry capex. Our value proposition is clearly resonating with our customers as demonstrated by the success of recent new product introductions and our leading portfolio of integrated digital solutions. Underlying demand trends in Q1 were strong, slightly ahead of our expectations and we've seen continued momentum through the month of We have yet to see any discernible demand impacts from tariffs or trade policy uncertainty with little evidence of material pre-buying in our results. Book to bill in line with our expectations came in slightly under one in the quarter. Based on strong Q1 results and our Q2 outlook, first half results are tracking ahead of the plan we laid out for you in mid-February. We're maintaining our full year guidance including the current impacts from tariffs and now we're selecting a more cautious demand backdrop in the second half. Our portfolio is resilient with leading positions in attractive end markets. Convenience retail and fueling, which accounts for about two-thirds of our sales has historically grown above GDP and experienced only low single-digit declines in the last major recession in 2008-2009. We're proactively managing our tariff exposures and we're confident we'll be able to mitigate the estimated cost. Given the confidence in our business, our board recently approved the replenishment of our $500 million share repurchase authorization which gives us ample capacity to prosecute buybacks. Let's turn to slide four. Given the volatility around tariff and trade policy announcements, we thought it would be helpful to provide a quick update on the estimated tariff impact based on what we know today. In the four-plus years post-spend through ongoing risk management, we have significantly strengthened the agility and resiliency of our global supply chain. The primary focus of our de-risking efforts has been geographically diversifying our supply base with a specific emphasis on reducing our exposure to China by a factor of more than three times. We continue to transform and strengthen our supply chain with additional initiatives to further reduce our exposure to China. Recognizing the fluidity of the ongoing tariff and trade situation, we estimate the current cost impact at approximately $50 million before any further mitigations or pricing actions. Note that this represents what we would expect to incur in the balance of the year. As you can see in the table, most of the impact is related to product source from China which reflects the aggregate cost of three separate tariff categories on both tier one and tier two suppliers. The remaining approximately $10 million ties to our exposure across the rest of the world primarily represented by a few southeastern Asian trade partners. This also includes the impact from section 232 steel and aluminum tariffs. Nearly all of the product source from Mexico is compliant with the USMCA exemption and therefore does not represent headwind. We continue to countermeasure the tariff impacts across our businesses. These actions include further supply chain optimization and diversification, aggressively negotiating cost reductions with suppliers and passing through price increases. We expect to offset the estimated tariffs and neutralize the impact to our margins. It goes without saying that we are closely monitoring developments and we will update you as the situation continues to evolve. Our primary focus is to control our controllables, executing on our pillar one initiatives to optimize our core, leveraging self-help. One good example of this is our annual CEO Kaizen event which took place last month. Cross-functional teams from across our businesses came together with a shared purpose of delivering step change improvements to our business. 90% of the projects worked on during the Kaizen were focused on our FPP 8020 process ranging from product line simplification to strategic pricing. As I mentioned previously, our largest end market convenience retail and fueling has proven to be resilient in prior downturns. This has been corroborated in our checks over the last couple of weeks with larger national and regional operators reiterating confidence in their capex plans and expectations for growth. Likewise, our channel partners are not seeing any evidence of project delays or deferrals. As an example of the momentum in the industry, 7-Eleven recently announced plans to double its North American new store openings to 1,300 by 2030 including 500 stores between 2025 and 2027. Most of those stores are expected to leverage 7-Eleven's modern design which has driven average daily sales 18% higher than their fleet average. Our Macco Expo event in mid-April was successful and performed slightly ahead of last year's record event. The competitive advantage of our business model was on full display. Our market-leading new product vitality allows us to meet the immediate needs of service technicians with a focus on optimizing premium quality with value. At the same time, we're monitoring our repair solution segment closely, particularly given the impact of inflation and declining consumer sentiment. I'm proud of the way our teams executed in an increasingly dynamic environment demonstrating a strong alignment with the principles of the volunteer business system and a commitment to the three pillars of our value creation framework, optimizing our core, accelerating profitable growth across the portfolio, and sensibly expanding into adjacent markets. In the current macro environment, we are focused on what we can control and doubling down on our pillar one opportunities. With that, let me turn the call over to Anshuman.

Thanks, Mark, and good morning, everyone. I'll start off with a summary of our consolidated results for Q1 on slide five. Sales of $741 million exceeded the midpoint of our guide by just under $20 million with upside at both mobility technologies and environmental and solutions. Core sales declined .7% year over year, better than our guidance range, led by low double-digit growth at mobility tech, driven by strong double-digit growth at Invenco. Adjusted operating profit margin down 40 basis points was in line with our expectations. Compared to the full year 2024, operating profit margin increased 30 basis points. Adjusted EPS increased 4% to $0.77, above our guidance range of $0.71 to $0.74. Pre-cash flow of $96 million increased over 20% year over year, reflecting a reasonably strong 83% conversion to adjusted net income or 13% of sales. Turning to our segment results starting on slide six. Environmental and fueling solutions achieved core growth of approximately 1% or up 11% on a two-year stack basis. We continue to see solid demand for both above ground and underground retail fueling equipment. LD activity for underground equipment, including upgrades to our cutting edge automated tank gauge solution, the TLS450 Plus, as well as our four-horsepower submersible. We're also seeing steady above ground dispenser demand tied to new-build, retrofit, and replacement activity, all supported by evolving consumer preferences, advancing technology, and ongoing regulatory changes. Segment operating profit margin expanded another 20 basis points, driven by productivity and simplification efforts. Turning to mobility technologies on slide seven. Core sales increased nearly 13% compared to the prior year, with Invenco again demonstrating solid performance, up over 20% for the third consecutive quarter. Global demand for enterprise productivity and unified payment solutions continues to support growth at Invenco. Our customers are focused on enhancing the consumer experience on site, driving increased revenue and streamlining operations, all of which are better enabled by Invenco's digital solutions and technologies. DRB sales declined double-digit year on year, but in line with our forecast and normal seasonality. While tunnel system sales declined in Q1, the outlook for new tunnel builds remains unchanged, flat to slightly down for the full year. The DRB team is expanding recurring revenue base through a number of initiatives, including increased conversion of existing customers to a next-gen patheon software platform. This focus drove low single digit recurring revenue growth in Q1. Segment operating profit margin decreased 40 basis points versus the prior year, mainly on a one-time settlement. Q1 mobility tech margins were 20 points above the full year 2024 rate. On slide 8, repair solution results reflect the impact from the timing shift of Matco Expo, our largest selling event of the year, from Q1 to Q2 this year. Service technicians continue to defer discretionary spending in this environment. Large ticket items such as tool storage continue to face challenges, as technicians prioritize quicker payback productivity enhancing tools. Segment operating profit margin declined by approximately 280 basis points, reflecting volume and mixed headwinds, in large part due to the shift in Matco Expo. Sequentially, margins have remained stable over the last four quarters, which has been an encouraging trend. Turning to the balance sheet on slide 9. During the quarter, we accelerated our shared repurchase activity to take advantage of the market dislocation, buying back $55 million worth of stock. Given current valuations, we firmly believe that shared repurchase remains one of the most attractive uses of our capital. In line with this commitment, we received board approval to replenish our shared repurchase authorization back to $500 million. Looking ahead, we anticipate over half of our free cash flow in 2025 to be deployed towards shared buybacks. Turning to the updated outlook assumptions for Q2 and the full year on slide 10. For the second quarter, we are projecting total revenues in the range of $725 to $745 million. We expect adjusted operating profit margin expansion of 30 to 80 basis points, resulting in adjusted EPS in the range of $0.70 to $0.75. Turning to the full year, as Mark mentioned, at the start of the call, we are maintaining our previously issued guidance. More specifically, we are not making any changes to the core elements of our guide. I would point out that we have updated our modeling assumptions to reflect lower interest and share count for the year. Our adjusted EPS range is unchanged at $3 to $3.15. Despite the upside in Q1, slightly improved outlook for Q2, and modest tailwinds from FX, interest and share count, we thought it would be prudent to embed contingency into our guide. While we are well prepared to execute in any environment, we are taking a more cautious view of the second half demand, given continued macro uncertainty. The end markets we operate in have proven to be resilient in prior downturns, and we would expect our portfolio to outperform on a relative basis. Our current tariff exposure is manageable, and we are confident we can mitigate the impacts. Our business is heavily indexed to the U.S., and our sales exposure to China is less than 1%, and our global manufacturing footprint leverages in region for region. We have a solid runway of self-help opportunities through our Pillar 1 actions, and we are returning capital to shareholders through share buybacks. With that, I will pass the call back over to Mark for his closing comments.

Thanks, Ann Schuman. I am encouraged by the start to the year, and I am confident in our ability to execute in a challenging environment. Our current exposure to tariffs is limited, and we are actively managing known headwinds. I am also encouraged by the leverage we get from producing in region for region. As a reminder, our sales into China are minimal, a result of us working down exposure to China since then. We have leading positions in resilient end markets that have performed well in downturns. While the second half suggests some uncertainty, we are positioned well with the strongest players in the market. Our leading market positions, along with recent innovations solving our customers' high-value problems, are resulting in share gains. Our connected mobility strategy is showing traction, and we have significant runway of self-help opportunities ahead, both of which position volunteer well for the future. With that, operator, please 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 the star followed by the number one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the process, please press the star followed by the number two. 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 Nigel Ko of Wolf Research LLC. Please go ahead.

Thanks. Good morning, everyone. Thanks for the question. So, Mark, I just want to pick up your comments on the contingency in the back half of the year. Makes total sense, obviously, but number one, have you seen any evidence support that there was this more of a macro contingency? Perhaps just refresh us on how the 2% organic is changing between price and volume. I'm assuming that some price increases will offset those tariffs.

Yeah, thanks, Nigel. Appreciate the question. So, first of all, we're not seeing any demand destruction. The markets have been very resilient. So, everything that we see so far, and we've been really digging deep into looking at some of the demand signals here. And we're fresh off an international car wash show. We're fresh off meeting with some of the COs in a NAX event earlier this week, as well as the MACO expo, as well as a fleet show called the Advanced Clean Technology Show. All of that is very, very recent information with pretty deep channel checks there. And so, we're not seeing indication of any demand destruction. So, as it leads your question into the second half, pretty resilient markets that we're dealing with. And we're able to manage that tariff impact that we articulated with with half of that being through price. I think we've been demonstrating from our businesses, we've been able to get price historically. And while obviously in this situation, we need to be careful with the price increases that we do prosecute in the market. I think we feel very confident with what we've got. We've also gone out with many of our price increases already. And so, they'll be taking effect here pretty shortly as that leads to the second half question that you asked.

Right. And maybe just some some cover in terms of the second half, how the price versus volume looks in that second half.

Yeah, Nigel. So, if you look, we are having a little bit of a stronger half one, obviously coming off a solid Q1. And even our guide for Q2 is slightly above the previous implied guide that we've given. For half two, we basically embedded about a one percent core growth. Now, a lot of that will come from price, given the current environment. We're a little more cautious on volume, just given the macro.

That makes sense. And then just a quick couple of quick applications, Shuman. You called out the macro show very successful. I think that's maybe 25, 30 million dollars from one Q2. You just want to make sure that's the right number. And given your share buyback comments, I think it implies maybe 225 million dollars plus of buybacks. I'm getting a lower share count for the full year. So, just want to make sure we're calculating that properly.

Yeah. So, as Mark had mentioned, Matco Expo, we were very pleased with the results. It was in line with the previous year, which was a record expo. But also, we believe, given that this was the price point event of the year, given the tariff uncertainty and price increases related to tariff, potentially, there might have been some pre-buying at the expo event. And the base demand might be a little bit softer, given consumer sentiment having turned down negatively. On the share count, yes, if you think about 400 to 450 million dollars free cash flow for the year, say, a little over 200 million in buybacks. Usually, our cash is pretty back-end weighted just from the seasonality perspective. So, the buybacks would also tend to be a little more back-end weighted for us. And that's kind of what's embedded into the guides, just the average share based on that.

Okay, great. Thank you, Anshuman.

Thank you. Another question comes from Julian Mitchell of Barclays Investment Pack. Please go ahead.

Maybe just wanted to start off with mobility tech. So, we have this sort of odd dynamic in the first quarter of very, very strong sales growth, but margins down. Just maybe sort of flesh out how do you see those two items evolving through the year for mobility tech, please, and when we should see the margins return to growth?

Yeah, we're having Anshuman jump in on this one, but let me just point out here on mobility tech that we're seeing a pretty consistent now average growth. I think it's indicative of the investments that we've been doing in this space, a lot of the digital transformation that's at the forefront of the C-Store. You know, C-Store is about 70% of the volume that we serve, and I think we're beginning to see pretty consistent payoffs and share game there. Anshuman, you want to jump in on the question?

Yeah, Julian, on the margins, if you remember, we've guided that margins would be relatively flat for mobility tech in Q1. They were down 40 basis points on a one-time settlement that we had, but compared to last year's average margins, mobility tech margins were up 20 basis points. Q1 was unseasonably high last year, just based on some mix. For the full year, we're still expecting good margin expansion for mobility tech year on year. We expect margins for mobility tech to be up close to 100 basis points or about 100 basis points for the full year, and you'll start seeing that read through starting with Q2.

That's helpful, thank you. On the repair business, that's probably the one that in a way has the sort of least visibility, very, very short cycle. Just sort of help us understand for that piece, are you still thinking you can get to sort of flatish sales for the year, or is that something where maybe the back half now, they may be put into a similar decline just because of the environment? When we're looking at tariffs, is there any one segment that you're worried could have a net headwind in 2025 overall?

Yeah, so there's no question that the MACCO business is short cycle, and we are very cautious on what we're sort of seeing here in a demand picture. At the same time, we're on the case, we're spending a lot of time coming off the MACCO Expo, looking at it by category, spending a lot of time with our distributors and with service technicians. First of all, the MACCO Expo, sort of the pre-buy and the event itself are in the books, there is a post-selling activity that goes on, and that's normally the largest stocking event of the year, so they do normally take in inventory. They started with the truck inventory or the store inventory, as we call it, at a really good level, so they didn't start at a high level, which is encouraging, and so the fact that they had a pretty solid buy based on the lineup that we offered, so we introduced another 500 SKUs. We tried to be very sensitive to the solutions at better value, but at the same time, we launched the new success toolbox, which is our high end toolbox that also sold quite well, but there's no question that we watched the sellout from our stores or from our trucks, and we've seen in April some of that sell off weaken as well, so we would anticipate a more cautious demand environment for MACCO, but that's factored into our guide, so do you want to add some further color there, Shivan?

Shivan Gupta Yeah, given the current MACCO, we don't believe MACCO or repair solutions will be flat this year. I would expect that to be down mid-single digit plus, but again, from a guide perspective, keep in mind we're continuing to see strength across the vast majority of our portfolio, which is convenience retail, both from the C store and the new builds for the car wash with the channel checks coming in strong, so potentially some offset there, and then also FX should be a little bit of a tailwind versus the previous guide for the full year in the tune of about 10 million, which can offset some of the repair solutions weakness, hence we kept the guide intact.

James Johnson Thanks, and your point was there isn't a tariff net headwind for repair for the year or either of the other two segments?

Shivan Gupta Yeah, I think MACCO is a little more disproportionately exposed to tariffs in the other businesses, but it's not a significant issue. If you look at our business, 20 percent of our business is repair. At the same time, we have a lot of mitigating aspects. If you look at our exposure, particularly on MACCO, from a couple years ago, we were more than three times exposed. I'm really proud of the team's work here. We've been working very diligently prior to the April 2nd announcements that were made to be able to manage that supply chain accordingly, particularly out of China, and I think they've been very successful in doing that. Still more work to do, but I think at the same time, we've got a good balance, a good lineup, and I think we're on the case, and I think it's something that is certainly manageable when we get our arms around from here.

James Johnson Thanks a lot.

Oben Hotez Thank you. Our next question comes from Andrew Oben of Bank of America. Let's go ahead.

David Ridley This is David Ridley laying on for Andrew Oben. On the environmental and solutions, I know that each one of these projects, site modernization and so forth, is probably small dollars, but I'm wondering, are you picking up any hesitancy or companies perhaps phasing in things on a slower basis? Anything on your customers' capital planning, scheduling, etc.?

Oben Hotez Yeah, look, I really appreciate the question. We paid a lot of attention to that. We're looking pretty deep into our customers' ability to move forward their projects, both what we call NTI or new to industry, which are new builds, which are brownfield and greenfield, as well as what we call refresh and retrofit, which are smaller size projects that you were indicating in your question. We're very confident of what we're seeing so far that folks are clearly full speed ahead. One of the backdrops here that might be different than some of the other industries is that the convenience retail space is pretty resilient when it comes to downturn. We ask questions a lot, particularly of our business owners that we serve that have been around for a long time in the industry, particularly back in the last major recession 2008-2009. Our business is not immune to recessions, but it's very resilient in slowdowns in the economy and in recessionary periods. One of the major reasons why is that there is a trade down effect that happens where the C-Store space benefits from that. Also, what tends to happen is that oil prices drop, and that's also very good for the industry, particularly in the U.S. where they're able to make more margins. They're very cash flow positive, even though some of the store traffic in some cases might be spotty. At the same time, their balance sheets are strong. The venues that we're serving, the largest players in the industry, the large regional and national, as well as international players, are advancing very successful formats. They know that those drive greater store traffic for them. It's something we're paying a lot of attention to, to see if there's any demand signals that do start to drop off. But so far, everything that we're seeing is they're certainly going ahead from even a slowdown that most folks would expect would be hitting some of the markets. Got

it. Then just a quick follow-up on the Invinco pipeline. Obviously, you're having continued success, just sort of reputationally with some of the remaining large players that haven't converted on. How are those conversations ongoing?

Yeah, so we're having pretty high-level meetings. As you can imagine, these are long-cycle sales opportunities. They involve a cutover of critical technology for them, and they continue to progress really well. I think the proof points we have out there bode well for follow-on orders. I think a lot of folks don't want to be first when you introduce a major technology change like this, and you see we're kind of through that initial vanguard of orders, and we're ramping pretty nicely, is what you see in some of our numbers. So I think that bodes well for the medium-longer term here as we continue to work through this. No slowdown in conversations. If there's anything, there's more conversation, more pilots that are ongoing. So we feel really good about the momentum we have there in that business.

Thank you very much.

Thank you. Our next question comes from Andy Kaplowicz of Citigroup. Let's go ahead.

Hey, good morning, everyone. This is actually Jose on for Andy. Maybe to start, could you talk about the progress you're seeing from your focus and prioritization process and your other simplification initiatives, given your gross margins of 45% plus in 2024 and also in the quarter. How are you viewing the path of the 150-bits margin improvement by 2026 target that you outlined at your investor day before?

So look, our FPP process is what most folks would know an 80-20 process with product line simplification, customer lists and raving fans. I will say we have a tremendous amount of runway ahead. We're continuing to have very engaging business reviews with each of our businesses on the opportunities that we have for further simplification. You know, we're a high-mix, low-volume business with engineered products, and that complexity has really been conspiring against us for quite a bit of time. So we have a lot of opportunity to clean up. We've also been taking some of those investments and some of those cost savings in recent years and plowing that back into R&D so we can get growth. You know, we're talking about Invenco. It's a prime example of spending more on development on a customer high-value problem. You can see the uptake that we're having on that. So we're also not, you know, forgetting the growth element of that. But I think from a self-help opportunity as we lean into this, particularly with, you know, folks who might be cautious about demand, we're certainly cautious about demand. I think there's a really, you know, solid set of opportunities that we have and very engaging each of our operating companies. We have our VBS office where this is sort of run out centrally as well as finance is very involved with this. We've also engaged our data analytics team more effectively to pull out insightful elements here to help us clean up our portfolio. Do you want to comment on the margins in Schuman?

Yeah, and I think we still feel comfortable that we have a path to the 150 basis point margin expansion over the three years that we've laid out. So we feel there's a significant runway for opportunity to continue to expand margin.

Thanks. And then maybe a follow on on mobility tech. You called out in your presentation growth and driven. Could you update us on that business and your current EV strategy? How are you thinking about the potential growth on that side of the business?

Yeah, so our drives business is a relatively small part of our portfolio, but has been experiencing very high growth. What drives does is it provides the software for anybody who wants to manage a fleet of electric chargers. You know, typically it's high speed chargers. It's very difficult to do the tech stack to be able to manage that with very high uptime with great energy management capabilities, how it backs into the grid, as well as how you attract consumers to be able to charge and make that effective. You know, we are number two worldwide with the number of plugs under management with the drives platform with roughly about 110,000 plugs in our management at a clip of a very high growth rate on a multi year basis. And we're continuing to get very strong demand from some of the largest charge point operators in the world. I think if you're going to be a charge point operator and more and more you start seeing the convenience store operators looking to be able to do this themselves, like Circle K is a great example of that, as well as others, they want the tools to be able to do that. You have a choice to make. You either going to write that software yourself and some charge point operators choose to do it, but they find that to be very difficult for them to do. And so those are some of our best customers that have worked on and tried that for some period of time. And then they'll convert. And we've been converting a large number of these charge point operators as well as new charge point operators at scale. That's something we think bodes really well because it's a SaaS business at very high margin. And it's something we've invested in historically, but now we're beginning to get growth and we're actually beginning to show up at the volunteer level.

Appreciate the time, guys. Thanks.

Thank you.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Mark Morelli for his closing remarks.

Yeah, thank you, Aubrey. I appreciate everybody joining us on the call today. I'm encouraged by the start that we've had at the beginning of this year. As we navigate through this near-term uncertainty, our teams will continue to execute and advance our strategic initiatives. We are confident in our ability to deliver differentiated solutions that create value for our customers and returns for our shareholders. We appreciate your continued interest in volunteer and look forward to engaging with many of you on the road in the next couple of weeks. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.